Agenda item

To provide the Investment Board with an opportunity to consider investing in residential property as part of the Commercial and Investment Strategy.

Members considered the Consideration of Investment in Residential Housing report presented by Peter Catchpole. 

Members made comments, asked questions and received responses as follows:

·         Councillor Boden said that having reviewed the report he thinks the Base Financial Assumptions are subject to challenge.  We need to look at what our own potential immediate borrowing costs may be, and it would be unlikely that we would be looking at a 5% p.a. He feels the management costs are too low but the responsive maintenance costs too high and incorrectly dated, as well as the major repairs provision from year 5.  For example, the biggest repairs likely to arise would perhaps involve a replacement boiler and this could potentially happen any time from year 1. However, he believes the occupancy level of 96% is achievable if managed properly and the  only way this can be done is if the day to day involvement of officers is kept to a minimum; we are not able to run a private property company and would need a professional property management agent to work on our behalf.  Our primary involvement would be at the acquisition and potential disposal stage. He would look towards concentrating the area where we sought to have the accommodation and given the market that exists, should be Wisbech based.  Councillor  Boden added that we should be looking at properties that would achieve the better yields, which he feels to be smaller flats, which exist in a fair number within Wisbech, and particularly those where the leases do not have a very long period still to run. He would hope these would have an average of at least 8% gross yield and a 5% net yield. However the important thing is that the provision of services from FDC to Fenland Futures Limited (FFL) would itself manage to defray some of our costs within FDC and we may have some significant differential in terms of the interest to be charged because if FFL were a standalone company it would not be able to obtain the level of funding that FDC could.  He noted that no account had been taken in the analysis of capital appreciation, therefore we would need to have a plan for both the capital value of properties and their disposal.  Councillor Boden stated that he was disappointed that it has not been mentioned that we could have our own housing officers to view each property  and carry out an HHRS assessment  instead of having a survey which would reduce our external costs, as would doing our own searches.  He added there was no mention of a cash purchase factor, which would put us in a stronger negotiating position in terms of the capital cost of acquisition, neither have we  factored in any renovation costs which may be required at the start of an acquisition.  Furthermore, we have not allowed for the cost of annual gas or electrical safety certificates which are legally required.  In conclusion, it would be essential to have a managing agent in place to carry out all these tasks and to organise repairs and maintenance. Councillor Boden's understanding is that those repairs and maintenance costs are not tax allowable anymore in a corporate setting, but this needs to be confirmed. Stamp duty land tax also needs to be included in any calculations as does ground rent and lease charges. For many freeholders they make additional money on insurance and maintenance charges to the leaseholders. Therefore there are number of items to be added to this list but we have the bonus of being able to keep everything local, it relates to our own residents and we have the security of having an asset which is reasonably easily realisable and in the long term there is no reason why the value of property will not continue to increase.  Councillor Boden added that he felt that it would be useful to involve Councillor Hoy, not only as Portfolio Holder for Housing but given her professional experience in the commercial letting market where her input would be extremely helpful to assist us in building a proper business case.

·         Councillor Boden said that from a tax point of view, he is a little concerned about doing all this work under FFL if it is also going to be used for other businesses. He asked if this would this be treated for tax purposes as a separate business or would everything FFL did be treated as one business for corporation tax purposes. He would like some consideration to be given to whether a separate subsidiary should be set up to deal with this. 

·         Peter Catchpole said that the steer provided by Councillor Boden would help to build more accurate projections going forward. He added that in the LATCo business case there had been a discussion about FFL being the holding company potentially with other trading companies underneath if required. If we go down this route, we would have a separate trading company for the residential property investment, and it is worth exploring as part of the business case.

·         Councillor Benney agreed and said any kind of lettings should be dealt with in a separate way to other kinds of investment we are looking at. We are trying to generate income and if we do anything which is speculative, we are risking our assets, therefore it makes prudent business sense to create a limited company to protect them.

Investment Board AGREED for officers to continue with a full business case.