Agenda item

A.14/17          

Following a request made by the Committee (Minute A.7/17 refers), Members considered a report that outlined the risk and governance aspects associated with the proposed Commercial Property Acquisition Strategy.

In discussion, it was apparent that the Committee had serious reservations over these aspects of the proposed Strategy and, in so doing, Members made particular reference to:-

(a)    the lack of adequate provision for investment in a variety of differing asset classes.  A Member stated his view that the Strategy was not sufficiently addressing the need to invest in a spread of different asset classes in order to ensure that risk was mitigated as far as was practically possible.  The Committee also requested that it be in receipt of the research paper produced by CBRE Global that was referred to in the presented agenda report entitled: ‘What’s in a number?  How to achieve the optimum portfolio size?';

(b)    skills and capacity.  In light of the competitive nature of the industry, Members sought reassurance and an explanation on the statement in the presented agenda report that ‘South Hams benefits from employing several officers who have significant experience of acquiring, managing and disposing of multi-million pound commercial properties, both in the private and public sector.’   Furthermore, Members queried the appointments process adhered to for the Invest to Earn Working Group and felt that, in the event of the Strategy being approved, the Terms of Reference and the Composition of the Group should be reviewed.  Once this review had been undertaken, the Committee was also strongly of the view that its membership should then be revisited and determined on a ‘fit for purpose’ basis akin to the process adopted by the Salcombe Harbour Board;

(c)    the risk of legal challenge.  Whilst the report highlighted that there was a risk of legal challenge, the view was expressed that the emphasis on this particular risk had been significantly underplayed;

(d)    the risk associated with a drop in capital value (e.g. Brexit impact, local economy implosion and market downturn).  Such was the climate of uncertainty at present, that Members were adamant that the score associated with this risk should be increased from a definition of ‘manage’ to ‘escalate’.  As a general point on the risk analysis of the Strategy, the Committee raised further queries over some of the associated scores.  As a consequence, the Committee concluded that these changes would necessitate an updated Risk Analysis being produced and circulated to all Members of the Council before the Special meeting on 27 July 2017;

(e)    the anticipated low profit margins when comparing costs with yields.  A Member highlighted the risk associated with a reduction in rental income (void / tenant default / tenant liquidation) and was of the view that such an income stream was too unpredictable to warrant his support of the Strategy;

(f)     the exit strategies.  Members were also dissatisfied at the lack of information concerning exit strategies arising from both the purchase of each individual Commercial Property and the loan commitment;

(g)    regular reviews of the Strategy.  In the event of the Strategy being approved by the Council, Members emphasised the importance of regular reviews being undertaken during each tranche of the project.

In response to these reservations, officers attempted to allay a number of the concerns expressed and reminded the Committee that the Strategy had been designed to provide a sufficient income stream to cover a meaningful proportion of the Council’s predicted budget gap . Nonetheless, Committee Members remained unanimous in their concerns over the risk and governance aspects of the proposed Strategy and wished for these views to be reflected in a resolution that would be presented to the Special Council meeting on 27 July 2017 and it was consequently PROPOSED and SECONDED and put to the vote declared CARRIED:

RESOLVED

That the Audit Committee:

1.   has considered the Council’s draft Commercial Property Acquisition Strategy and expresses its particular concerns that the risks attached to the following areas have not been adequately addressed or mitigated:

(a)    The Exit Strategies arising from both the purchase of each individual Commercial Property and the loan commitment;

(b)    The Strategy not making adequate provision for investment in a variety of different asset classes; and

(c)    The anticipated low profit margins when comparing costs with yields;

2.   requests that an updated Risk Analysis of the Strategy be produced and circulated to all Members of the Council before its meeting on 27 July 2017; and