Meeting documents

Councillor Bowles

Deputy Leader and Cabinet Member for Economic Development Delivery

 

To consider the attached report.

 

Contact Officer:  Andrew Small (01296) 585507

(a)          Decision(s)

 

(1)  That approval be given to AVE’s draft Business Plan for 2017/2018 (as set out in the confidential section of the Cabinet report) and that progress against key performance measures be reviewed in six months time.

 

(2)  That in conjunction with the above report, and at the conclusion of the finalisation/audit of AVE’s accounts, a commentary be submitted that would enable Cabinet to compare the performance made with the 2016/17 Business Plan against the key performance indicators for that financial year.

 

(b)          Reason(s) for Decision(s)

 

The Members’ Agreement requires AVE to prepare a Business Plan before the end of the accounting year and circulate this for approval by the Council and Akeman.

 

 (c)       Alternative Options Considered

 

Not to approve the Plan.  However this would constrain AVE in pursuing its objectives of generating investment and delivering income from the Commercial portfolio.  Cabinet wished to have the opportunity to review both progress on the 2017/18 Plan and progress made against the key performance indicators contained within the 2016/17 Plan.

 

(d)       Relevant Scrutiny Committee

 

Economy and Business Development.  That Committee received a report at its meeting held on 5 December, 2016 and had, based upon the information available, recommended approval of the 2017/2018 Business Plan.  The Chairman of the Committee attended the Cabinet meeting and elaborated upon the Committee’s deliberations.  Representatives form the AVE Board attended both the Scrutiny Committee meeting and the Cabinet meeting and were tested rigorously on the assumptions made in the draft 2017/18 Plan.

 

(e)        Conflicts of Interest / Dispensation(s)

 

None.

 

 

 

 

 

The Council and the Akeman Partnership LLP (Akeman) had established Aylesbury Vale Estates (AVE) as a limited liability partnership in October, 2009, following a competitive procurement exercise, to manage, improve and develop the Council’s commercial property portfolio, and provide an income stream to the Council.  On completion of the agreement, the Council had sold the majority of its industrial and commercial estate to AVE LLP at market value.

 

The Partnership was governed by a formal Members’ agreement and managed by a Partnership Board, on which the Council had three representatives.  Akeman had produced a draft Partnership Business Plan as part of their bid which had been approved by the Council in June 2009.  The final version of the Plan had formed part of the completion documentation approved in October, 2009.  The Board met on a regular basis to review progress made with the Business Plan and to monitor the performance of the Asset Manager, Akeman Asset Management LLP.

 

The Members’ Agreement required AVE to prepare a new Business Plan before the end of their accounting year (which now mirrored the Council’s financial year), and to circulate this to the Council and Akeman for approval.  The Agreement also provided that the Council and Akeman would use all reasonable endeavours to agree the Business Plan within 90 working days.  The Business Plan was a critical document.  The Members’ Agreement required the Business Plan to set out AVE’s objectives for the life of the Partnership (i.e. 20 years), and the annual overarching objectives for each accounting period.  In particular, the Plan had to include a statement to the effect that AVE’s business should be operated with a view to producing the best risk adjusted profit obtainable, and to maximise the adjusted rate of return to the Council and Akeman.  Subject to agreement between AVE, Akeman and the Council, the Plan was also expected to include the following matters, based upon a three year projection, where appropriate:-

 

·         Strategic business objectives and targets.

 

·         Gross and net rental income projections, including an assessment of operating costs, rental voids, rent arrears and any other losses and receipts.

 

·         Annual portfolio valuation prepared to a standard acceptable for AVDC financial reporting purposes.

 

·         Confirmation that the financial covenants regarding loan to value and interest cover were being maintained.

 

·         Projections of estimated receivable rent and confirmation of compliance with maintaining portfolio income levels.

 

·         Proposals for working capital budget, any new capital investments and re-investments plus any distributions to partners.

 

·         Performance against key indicators and targets and levels of achievement.

 

Once approved, the Business Plan provided the framework within which the AVE Board should work, similar in effect to the Budget and Policy Framework set by the Council for Cabinet.  Accordingly, if the Board wished to pursue any substantive action which was not provided for in the Business Plan, they had to obtain specific authority from the Council (either by Cabinet itself, or via a Cabinet Member Decision) and Akeman.

The draft 2017/18 Business Plan was submitted, as set out in full in the confidential section of the Cabinet agenda.  In the past, AVDC had retrospectively approved the Business Plan, but the timetable for the 2017/18 Plan had been brought forward to enable any forecast distributions or other financial implications for AVDC to be reflected in the 2017/18 budget (which indeed they had).  References to performance or issues occurring were therefore only up to the end of September, 2016.

 

The confidential Appendix included the cash flow for AVE and the Hale Leys Business cash flow position.

 

The Business Plan necessarily included a range of assumptions about the future behaviour of tenants and the wider market.  Some of these might come to pass and some might not.  Section three of the Financial and Investment Strategy included a "what if" sensitivity analysis which had been undertaken to assess the impact of both an upside and downside situation on each of the key assumptions in the cash flow based on the 2019/20 financial position.

 

Over the last twelve months the following progress had been made:-

 

Distributions

 

·         During the 2016/17 financial year, a distribution was made as a result of the Pembroke Road sale to AVDC and a further smaller distribution had been forecast to occur before the end of the financial year.  However, before authorising this further distribution, the Board would need to be confident that sufficient progress had been made on the major projects included in this Business Plan.

 

Assets/Developments

 

·         Signed contracts to develop a turnkey office building for the Kennel Club headquarters on the Gateway site resulting in a profitable land sale and developer’s profit.  So far the project was ahead of budget and would be delivered to the Kennel Club on time.

 

·         The phase 1 Gateway affordable housing development by VAHT was still not completed, but work was again progressing after a change of contractors.

 

·         Commissioned roofing works at Edison Road and Bessemer Crescent to improve the stock for existing tenants and reduce vacancies.

 

·         26 – 28 High Street, Winslow – A full planning application for a change of use was being progressed.

 

Key Performance Targets

 

·         The vacancy across the whole portfolio as at 30 September, 2016, was 11.8% down from 13.3% at the end of the previous financial year.  The portfolio remained on track to hit its 2016/17 financial year end vacancy target of 9.2%.

 

 

·         The total return of the portfolio over the twelve months to 31 March, 2016, was 8%.  Since inception, investors had received an annual return of 14.7% (assuming set up costs were spread evenly over the period of the joint venture).

 

·         Total budgeted portfolio income for the financial year ending 31 March, 2016, represented a variance to budget of less than 1% which was well within the KPT limit of +/- 10%.  For the first six months of 2016/17, actual income received had been ahead of budget.

 

·         Bad debts written off in the 2015/16 financial year, equated to 1.0% of total rent collected against the KPT limit of 0.2%.

 

·         The three month collection rate for the portfolio for the September, 2016 quarter had been 95%.  This had outperformed the three month KPI of 90% but had fallen slightly short of hitting the twelve month KPT of 100%.

 

·         The loan to value as at 31 March, 2016, had been 72.19%, below the maximum limit of 75%.

 

Looking Forward

 

·         There was an opportunity to dispose of non-income producing sites and together with income expected from other asset management projects, to use the receipts to help grow the portfolio and increase revenue flows through re-investment.  The three year Business Plan had been designed to take the portfolio to a position where these revenue flows could cover all running costs, asset arrangements and amortisation, and leave a surplus for distribution to members on an on-going basis.

 

·         The proposal was to re-invest AVE capital alongside new commercial debt to secure new assets.  All new investment had been assumed to deliver a net 8% income return on equity.

 

·         The delivery of an on-going annual distribution of £400,000 to members was one of the key aims of the Business Plan.   The quantum and timing of distributions in the short term might need to be flexible to achieve the long term aim of a robust positive net income stream and sustained annual distribution.

 

·         Target forecast vacancy for the portfolio at the end of 2017/18 financial year was 8.1%, which was a significant improvement on the vacancy position as at 30 September, 2016 of 11.8%.  Akeman was confident this forecast reduction could be achieved as the portfolio benefitted from the asset improvements made to the portfolio during the 2016/17 financial year.  The Rabans Lane area now had the best broadband in the town, better CCTV security and a vibrant tenant line up whilst still having the lowest estate charge and competitive rental levels.

 

·         The key focus of Hale Leys over the coming three years was to achieve 100% occupancy with longer term leases and strategic lease renewals, and to continue to increase the rental income and reduce debt write-off.

 

·         The financial target was to generate enough surplus annual income  which, after all costs  and amortisation, could be used to cover distributions to members.  The AVE Board would review other cash needs within the portfolio and set distributions each year at a level that did not hamper portfolio performance.

 

·         As part of an on-going review of expenditure, fees to external consultants would be benchmarked against other market providers.

 

·         Section seven of the Business Plan set out the key performance indicators and targets for AVE.  The indicators were a fixed part of the Members’ Agreement and were not subject to amendment.  However, it was possible to add/amend the targets and a review of the current targets would take place.  Once finalised, they would be attached to the Plan as an addendum.

 

It was reported that a number of important asset management initiatives were now underway, including the refurbishment of parts of the Rabans Lane multi-let industrial estate.  These works were essential both to retain tenants and to compete with other unit providers so that all units could in time be fully let at market rents.  The impact of the work had already been felt with demand for units increasing.  Other improvements to the site, e.g. broadband and CCTV, had been exceptionally well received.

 

Two other schemes, namely the new headquarters for the Kennel Club and the VAHT affordable housing scheme – both at the Gateway – were progressing and when completed, would result in income receipts to AVE.  There was however, some outgoing expenditure related to these sites in the form of Section 106 payments.

 

The question of whether a distribution to members would be made as proposed in the 2016/17 Business Plan (over and above the one expected as a result of the sale of Pembroke Road) was not yet clear.  It would be disappointing if this did not materialise, as generating an annual distribution for members was one of the key objectives when the Partnership had been formed.  However, operating costs, interest, amortisation and the costs of completing the improvement works, would all have to be covered first.

 

Whilst there were many positive points, the future financial prospects were now heavily dependent on the sale and re-investment of receipts and new income producing assets.  This dependency and the lack of liquidity in the partnership did give cause for concern and the risks had been reflected in the downside case in the Business Plan.  Should this materialise, the Council’s prospect of receiving a return would be adversely affected.

 

The Economy and Business Development Scrutiny Committee had received a similar report to that submitted to Cabinet and the Committee Chairman attended to elaborate upon the Committee’s discussions.  In summary the Committee had made the following principal points:-

 

·         The Committee had expressed concern that re-investment seemed to be slow and that this issue came up year after year.

 

·         Concerns had also been expressed about sales not being realised and the loss of rental income from vacant properties.

 

·         The Committee had been of the view that perhaps the Business Plan was too reliant on specific future developments and sales taking place.

 

·         The Committee had felt that progress made with the Business Plan should be monitored more regularly.

 

However, on balance, the Scrutiny Committee had been of the view that it was in the Council’s best interests to approve the draft Business Plan.

 

Representatives of the Board attended the meeting and were tested by Members on a number of the assumptions made in the draft Business Plan for 2017/18 and indeed also those made previously in relation to the 2016/17 Plan.

 

RESOLVED –

 

(1)  That the AVE Business Plan for 2017/18 be endorsed and that progress made against the key performance indicators be reviewed in six months time.

 

(2)  That in conjunction with the above report and at the conclusion of the finalisation/audit of AVE’s accounts, a commentary be submitted that would enable Cabinet to compare performance made with the 2016/17 Business Plan against the key performance targets for that financial year.