Why has Portsmouth City Council spent £108m buying commercial property?

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Portsmouth City Council has so far spent £108m on buying rentable commercial property around the UK, as part of a drive to generate income that can be used to fund services. As more purchases are planned for the coming months, the council here explains its property investment strategy.

Portsmouth City Council is leading the way nationally in terms of income generation.

Ninety per cent of this year’s budget savings have been achieved by generating new income and restructuring debt.

A major element of the council’s income generation drive is its property investment strategy, which brings in nearly £6.6m per year from the rent collected from a portfolio of 10 commercial assets.

Once costs are taken off, this has already made £4.3m of profit which can be used to fund services within Portsmouth.

The entrepreneurial approach has meant the council has been able to mitigate the ongoing cuts to council spending and protect services that would otherwise be at risk.

The extra money can be used to pay for things like libraries (£1.96m annual cost), museums (£759,900), weekly rubbish collections (£3.2m), community wardens (£148,800), homelessness services (£615,900) and school crossing patrols (£198,000).

More property purchases are set to be made in the coming months, generating more money for local services.

Here are some frequently asked questions about the property investment strategy.

Why does the council need to generate income?

Like all local authorities, the council is facing further cuts to the money it gets from the government. The council has to make £9m of savings in the next financial year and in the next three financial years we need to save £24m from around £117m of net controllable spend – this is in addition to £86m of savings already made in the last six years.

Council leader Donna Jones said: ‘We know the government’s revenue support grant is disappearing, therefore we must ensure we are a forward-thinking council with a proactive and ambitious appetite for income generation and business growth and that we fulfil the promise we made to the people of Portsmouth when we became the administration two-and-a-half years ago.

‘We promised that we would not just sit back and take the cuts without doing everything we could to bring in extra money to help maintain and improve the services that matter most to local people – and that is the basis for the property investment strategy.’

How have the properties been bought?

The council has borrowed money cheaply, mainly from the Public Works Loans Board, which lends to public bodies at very preferential rates compared to commercial investors. This borrowed money has then been used to buy standing investments – commercial properties with established tenants in place which generate a revenue stream for the council. The council collects the rents from these properties and then, once you take off the borrowing costs, what is left is the profit.

Cllr Jones said: ‘This commercial approach to managing the council’s finances has never been taken before in Portsmouth and I’m proud that we are setting positive behaviours.

‘We are proposing the lowest budget cuts of any city council in the country and one of the reasons that we’re able to do that is because of the success of the property investment fund.

‘We have taken this commercial approach after we surveyed local people on budget options. Nearly 1,300 residents, council staff and businesses responded with views and suggestions that have helped to shape our strategy.

‘A total of 85 per cent of those who responded agreed the council should generate income to pay for services rather than making cuts.

‘As a result this has been our focus and we have made income generation a top priority.’

Why can’t the money the council is spending on commercial properties be spent directly on services?

The property investments are being made with borrowed money. The law says the council can only spend borrowed money on assets with a life of more than one year and where it is going to make a profit or save on existing costs, meaning some of the money generated or saved can be used to meet borrowing costs. It would be illegal for the council to spend this money on day-to-day council services.

If a suitable investment property became available in Portsmouth, it is likely the council would try to buy it as an addition to its portfolio, but the site would have to meet the same criteria around the risk of the investment and the expected profit that all other investments are required to.

However the profit made through rental income of the properties can be spent on any services and is being used to help preserve services residents use across the city such as libraries, museums and weekly bin collections.

Cllr Jones said: ‘We have to pay back the money we have borrowed, including the interest on the loan, so we can’t spend it directly in areas that don’t generate a profit. But the profits made through this scheme are already being reinvested in Portsmouth services.’

What else is the council doing to generate income?

In addition to the property investment strategy, the council is also making sure it gets maximum value from the land assets it already owns.

It has signed an innovative deal with international insurance company Canada Life to make just over £73m from the Wightlink Isle of Wight ferry terminal site in White Hart Road. Canada Life will receive rental income for the site in exchange for paying the council a lump sum it can invest to make an even greater income.

The council still keeps overall ownership of the site and the money produced by this deal, once invested, will enable the council to generate an extra income of at least £2m per year.

Work has also started on Dunsbury Park – a 45-acre business park the council is building on land it owns next to junction 3 of the A3(M). The council has built a new link road to unlock the site and the first tenants, international clothing brand Fat Face, has moved into the first distribution warehouse.