Surrey County Council’s investment portfolio has been thrown into danger by coronavirus.
The council has £444 million invested in commercial property and the latest figures released show its value was already down 10% (£44.35m) on its purchase price – and that was in March before the effects of the pandemic.
The coronavirus crash and subsequent plans of many businesses to switch from office to home working means much of their investment could be at risk.
The council also holds a Halsey Garden portfolio, of which 39% is retail and 10% leisure – both sectors badly hit by lockdown and ongoing restrictions prohibiting many businesses from trading fully.
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If a prediction made in July by the Office for Budget Responsibility is accurate, that the price of offices and commercial buildings will fall by nearly 14% this year – that could reduce the value of Surrey’s portfolio by about another £56m.
Patricia Barry, land and property director at Surrey County Council (SCC), said the council was implementing a long-term strategy “to avoid knee-jerk reaction to short-term, unrealised valuation losses and work towards increasing income and value over the next five to 10 years.”
She said: “We’ve started looking at option appraisals around alternative use for some of our investments should that tenant struggle.
“We do need to be proactive, where the market is struggling we need to be on the front foot in terms of alternative use.”
The biggest reduction in value was Malvern Retail Park, which dropped £15 million, a third of its value at purchase, because of a deterioration in the retail market. Debenhams in Winchester halved in value, losing £8 million.
Other assets affected include Travelodge in Hatfield and Stratford.
A report to the SCC resources and performance select committee this week reads: “Nine offers have been received on each property from alternative operators, to break the Travelodge lease and re-let the existing property, which will maintain or increase the current level of income.”
The council also invests in cinema company Vue and their chief executive announced this week “we have no movies”, as the release of blockbusters like No Time to Die are delayed until next year.
John O’Connell, chief executive of Taxpayers Alliance, said the figures were “deeply worrying”.
He said: “Local authorities up and down the country made many poor decisions on buying and leasing out commercial properties in recent years. The pandemic has clearly bought this to a head.
“As we emerge from the coronavirus crisis, new measures and mindsets will be needed if we are going to make sure this doesn’t become a disaster waiting to happen for local authority finances.”
SCC says it is creating contingency plans, and some of the retail assets had not been affected.
“For instance we have Waitrose as one of our retail tenants who have fared pretty well in this, but then we’ve also got Debenhams who have not,” said Ms Barry.
The council had received offers to replace Debenhams, which is in debt and entered into a Company Voluntary Arrangement last year.
She added: “We are looking at, in the event a tenant defaults or there’s an issue with their business what do we do with that asset? This is very much a planning for worst case scenario that we can’t find another tenant, what is an alternative use for that site?
“We need to safeguard that investment and safeguard that revenue stream.”
The council says its commercial properties generate a total of £11.6m revenue, equating to £22.91 (1.5%) per year on the average council tax bill.
It is doing well compared with the national average in collecting rents amid the coronavirus fallout.
Nationally less than half of tenants paid rent on time at the end of June, but in Surrey it was 74% for commercial and residential properties combined.
Ms Barry said: “I think that is because we’re working very closely and in constant contact with our tenants.
“Whilst it’s not a fantastic picture overall, the team are doing a really good job in terms of rent collection under the current circumstances.”
Strategic finance partner Paul Forrester said: “The Surrey portfolio [within the county] is at a 92% collection already for the September quarter.
“Halsey Garden [outside the county] is at 72% but that does contain some tenants who are on monthly payments rather than quarterly so that will go up across the term of the quarter.”