Surrey County Council changes ‘reckless’ debt repayment strategy as value of property portfolio plummets

SURREY County Council is changing its debt repayment strategy after auditors called it ‘reckless’.

The council had not earmarked money from its budget to repay £233million in loans borrowed from the government for its commercial property investments across the country.

He counted on the sale of the property if necessary. But it emerged the council’s wallet was worth almost a quarter less last year than it paid for.

Mark Hak-Sanders, Strategic Finance Business Partner, said: “Our strategy for 2021 did not include any minimum income provisions for these loans, so we have not set aside any funds to repay this debt.

“The logic behind this was that if we had to pay off a debt as a county, we would be able to realize capital income from the sale of these investment properties to provide the money we needed to pay off the loan. .”

When Grant Thornton checked this policy, they said that although it complied with the law, they considered it “reckless”.

Mr Hak-Sanders said: ‘I would say it was with some hindsight.

“We established the policy before Covid-19 had a ripple effect on investment property values, and indeed Grant Thornton was auditing that a year later with the benefit of another year of reduction in those values ​​of investment properties.

“Nevertheless, we understood their point of view and we accepted that the policy could be more cautious.”

The County Council is to change its policy so that from 2022/23 a minimum amount will be deducted from their revenue account each year for all loans, including those made to its subsidiaries investing in property outside the county.

The government plans to make it a legal obligation from 2023.

The current year introduced a policy where it would only do so when a property’s market value was no longer sufficient to cover the outstanding loan, which Grant Thornton concluded was “no longer unwise, but optimistic”.

Councilor David Lewis, chair of the board’s audit and governance committee, said: “I think, hoping to speak on behalf of the committee, that we welcome the change to the strategy of providing minimum revenue. It is good to see that it has now been adopted.

At the end of March 2021, Surrey County Council’s Halsey Garton property portfolio was valued at £78m below cost.

Commercial properties owned by the council’s subsidiary, Halsey Garton Property Ltd, are now valued at £251.25million, a reduction of 24%.

The loss in value would be “largely due to pressures on the retail environment”, the portfolio comprising 37% of retail businesses.

The board will now set money aside each year to be able to repay the debt associated with these investments, aligning its policy with Grant Thornton’s guidance.

Mr Hak-Sanders said: “We need to look at the overall return and not just the return on capital – these properties, especially those showing a reduction in their capital value, are still making a significant contribution to the revenue budget and continue to do so as long as we hold them.

Anna D’Alessandro, corporate and commercial finance director, said the portfolio generates £8.5 million of net income for the council each year and stressed the loss was unrealised.

“The capital value only affects us if we choose to sell the asset, and we have no intention of doing so,” she said.

Mr Hak-Sanders added: “These investments are held for long-term return and although there may be fluctuations in the value of this portfolio, it is expected to recover over the medium term. .”

“To provide society with a return to its previous patterns of behavior,” said Cllr Lewis.

“But I think what we’re seeing as a result of the last two years is that the life ahead is probably very different and that could have an impact in terms of demand for commercial real estate and retail.

“It seems to me that we live in quite uncertain times. We have inflation rising quite rapidly to sort of 30-year highs and we don’t really know where we are with the pandemic. »

A separate Halsey Garton portfolio of 72 residences recorded a loss of £30,000 last year.

Strategic finance business partner Paul Forrester said this represented the company being in its early stage and only going to market for eight months and the outlook was positive.

Asked what they thought was the biggest risk to the board, Hak-Sanders said interest rates.

The council’s £1.95billion capital program requires it to borrow £1.3billion over the next five years.

Its level of borrowing as a proportion of what it spends is increasing – from around 2% this year to 6% in 2026/7.

Mr Hak-Sanders said this is similar to the 7% for comparable local authorities, adding that there is an interest rate reserve of £1.6m which could cover short-term rate increases .