The programme helped Harrow through a learning curve around commercial property investment that would have taken much longer without the LGA Productivity Experts Programme.
The Challenge
This piece of work formed part of Harrow’s wider commercialisation strategy which is looking to explore new ways of generating income from multiple sources. It aims to make Harrow Council a commercial and innovative authority so that it can continue investing in priority outcomes.
In anticipation of significant reductions in funding from the Government, Harrow Council started implementing a Commercialisation Strategy in early 2015. It was understood that existing ways of offsetting funding gaps were not going to work alone and with a wide definition of commercialisation, Harrow has started and delivered a number of commercial initiatives that impact on every part of the organisation.
These include:
- Setting up of trading companies;
- Expanding the Legal Service Practice beyond Harrow's borders;
- Starting a lettings agency focusing on the private rented sector (PRS)
- Investing in commercial property;
- Embarking on an ambitious regeneration plan including PRS housing;
- Partnering with a regional start-up to provide a local deals platform for the benefit of residents, businesses and the Authority;
- Investigating joint venture options to exploit the Authority's intellectual property;
- Delivering shared services models across the organisation.
The Productivity Expert was asked to focus on developing a council property investment portfolio with the purpose of earning an attractive long term source of income from council reserves to benefit the General Fund.
The council was looking to invest circa £20 million to generate income through focused investment in property. An existing portfolio did exist, and though it was being managed in an efficient manner, income was not a core objective.
Given Luton Borough Council’s sizeable property portfolio and the contribution it makes to their General Fund, Harrow wanted to learn about the criteria being used in determining that a particular property was a suitable investment and the governance process that was in place to approve its purchase. It was known that Luton’s portfolio was managed by a professionally qualified and experienced Investment Portfolio Manager.
This learning could then be used to fit Harrow’s specific investment objectives and internal resources aligned to deliver against these.
Key deliverables
- Proof of concept with potential rates of return
- two workshop sessions with senior officers & members
- draft investment strategy and principles
- organisational requirements e.g. capacity, skills, roles
- priority action plan
Anticipated Outcomes
- Agreed strategy and plans to deliver a financial contribution to long term funding challenges - estimated to deliver an increased, sustainable income stream from this work
- capacity in place to deliver
- organisational confidence to go ahead
The Expert from Luton was their Investment Portfolio Manager, Mr Richard Morgan. He provided specialist guidance on how Harrow could build up its property investment ambitions, with details on how it has worked at Luton and what the learnings from their journey have been.
This consisted of analysing our current property portfolio, providing details on the factors that determined whether Luton considered a prospective property for acquisition or not, the geographic considerations, the tenant considerations, strength of covenants, yield expectations and examples of where these factors led to a purchase.
The analysis of our current property portfolio included analysing rates of return and discussions with our Property Team.
The Expert led two workshops with senior officers, the first of which provided a deep insight into what Luton’s approach is, and the second which focused on our specific geography, needs and current position. This led to input into an investment strategy that was drafted, put before Cabinet and subsequently approved.
The strategy covered the following areas:
- Background
- objective
- scope
- strategy
- yield
- sector spread
- locations
- target assets
- assessment of risks
Harrow has in place a team which manages the current non-operational property portfolio and would, with the use of managing agents when necessary, be able to manage an increased portfolio.
However, they did not have the expertise to actively acquire and sell investment properties so this was sourced through an offer from Luton Borough Council to share their Expert.
The Impact
As a result of working with the LGA Productivity Expert programme, Harrow Council have achieved the following outcomes:
- Agreed a new commercial property investment strategy that aims to deliver higher rates of return than current investment options.
- The investment strategy has led to new acquisitions and revised the way existing portfolio stock is viewed.
- Greater organisational confidence in what constitutes an attractive commercial property proposal beyond the purchase price and yield.
- Staffing for the management of an increased portfolio were not changed, however the gap in necessary acquisition expertise was addressed.
- Engaged with a property specialist who can source, negotiate and recommend opportunities that meet the council’s criteria.
- Significantly reduced Harrow’s journey in re-inventing its property investment portfolio and implementing a new strategy.
Cost savings
Harrow Council will be looking to achieve a minimum return on its commercial property investments and will also be reviewing its existing portfolio of assets to determine which are falling short of the target rate of return and should be considered for alternative uses or disposal.
The Investment Property Strategy approved as a result of this work expects a gross yield of 7.5 per cent from new investments. After factoring in capital financing costs and other costs, the indicative annual income on a property portfolio of £20 million has been determined to be £350,000 per annum.
How is the new approach being sustained?
Harrow Council also utilised the Productivity Expert’s knowledge and contacts to develop relationships with others who have the necessary experience of operating in the property investment market to deliver recommendations of suitable properties.
Engaging in the Productivity Experts programme has delivered beyond the initial aims. Not only was learning and experience shared, but the Productivity Expert input was key in the implementation stages of this project as well.
Contact:
Council Contact:
- Tom Whiting, Corporate Director Resources & Commercial, Harrow Council, [email protected]
- Anand Pajpani, Commercialisation Lead, Harrow Council, [email protected]
LGA Contact:
- Grace Abel, Productivity Adviser, Local Government Association, [email protected]