Do you regret buying this?

The ‘this’ in the title of this article is The Mall and town-centre properties, bought on behalf of residents by the borough council. What follows is one of the Eye’s longer items – it’s about those 2016 purchases.

We’ve been listening to a YouTube recording of last week’s meeting of the council’s ‘Performance and Finance Scrutiny Committee’.  Indeed, we’ve listened to some of it more than once.

Our particular interest is in Item 8 of the agenda, which addresses the unexcitingly-titled ‘Property Investment Task and Finish Group Final Report’. This report is an independent review of the decision-making progress that led to the purchase of The Mall (now The Square, of course) and other retail property. At the time, there was concern – probably quite rightly – that the then owners of The Mall were reluctant to maintain it fully and keep it up-to-date.

We don’t have access to the confidential details considered in the review, so what we’ve written below is our interpretation of publicly-available information.

The £86 million decision to buy The Mall was made by councillors after just one hour’s briefing.  The briefing was limited to the choice between ‘buy’ and ‘not buy’; it didn’t consider any other options for maintaining/upgrading the shopping centre. 

This briefing was inadequate.  Quote:  “the information and supporting narrative was not proportionate to the size of the investment decision. The internal paper lacked sufficient detail on options, benefits and risks.”  Councillors “do not appear to have been provided with detailed decision-support documentation showing the case for public investment purpose,” Councillors were provided with a property valuation from just one source; a  valuation that was at the top end of the market; one which apparently took no account of the trend towards on-line shopping.

A few months after the acquisition of The Mall, the then Chief Executive approved the purchase of the House of Fraser and associated buildings.  The purchase was processed urgently, as another buyer was thought to be interested in the property.  (Our understanding is that the ‘other buyer’ was the county council.  If so, it’s difficult to see how residents could benefit from competition between the two councils.)  The review’s assessment of this purchase came to conclusions somewhat similar to those in the previous paragraph.

What the review doesn’t conclude is that the purchases should not have been made.  The main message is ‘only’ that the process by which they were approved was wholly inadequate.  It is up to councillors – and residents – to judge whether the outcome was good or bad.

Which is where the recording of last week’s meeting becomes particularly interesting.  The current council Leader said that he voted FOR the acquisition.  But another councillor said that they voted against it because they felt that the briefing was inadequate for such a major purchase.  A third councillor said that they had abstained for a similar reason – and that such a shambolic process (our words) should never be allowed to arise again.

Confusingly, the minutes of the meeting at which the current Leader said that he voted in support of the purchase record that he wasn’t present.  This ‘discrepancy’ wasn’t resolved during last week’s meeting;  but a public explanation is essential before public confidence is destroyed yet again.

Apart from highlighting the inadequacies of the decision-making process, last week’s meeting revealed a fundamental disagreement between councillors as to WHY The  Mall was purchased.  (We’re referring to those current councillors who were involved in the decision five years ago.)  Was the acquisition intended to be an investment, generating income to offset reductions in grants from central government?  Or was it to regenerate the town – in particular to maintain/update The Mall, which the then owners seemed reluctant to do?

We have no doubt about what the public was told.  Here’s a quote from the council’s own website: “Karen Whelan, Chief Executive of Surrey Heath Borough Council said: “The Council’s investment in its own town centre is testament to its ambitions to make Camberley an exciting destination and ‘kick- start’ our regeneration proposals. These investments will help secure long term financial stability for the Council as government funding for local authorities is reduced. ” 

Our conclusion from this and our recollection of other statements made by council personnel at the time is that regeneration was the short-term aim, and that income arising from the regeneration was the longer-term aim.  So both councillors were partly right – and partly wrong

Finally, who or what to blame?  Based on what we’ve read and heard, the borough council officers must be held primarily responsible; they provided councillors with an inadequate brief.  Councillors are not elected on the basis of any professional skills, and they cannot be expected to decide on major investment proposals without a full – and easily understood – briefing.  But, we suspect that some of the councillors voting in support of the purchase were not as critical of the inadequate briefing as they should have been.  To the extent that this suspicion is correct, those councillors failed in their duty to the electorate.

Finally, and to be fair, telling the future is difficult. Even experts can get it wrong – as the pandemic has shown. But the net result is that the council’s town centre investments have dropped in value by – at a guess – £70 million.  This compares with the borough council’s stated reserves of £32 million; a seriously-disturbing comparison.

26 thoughts on “Do you regret buying this?

  1. Well crafted review but unfortunately the Reserves are not POSITIVE £32M but NEGATIVE £31M due to the quirky way in which local authorities present their figures in the Balance Sheet. You cannot be faulted for your interpretation as unfortunately many of the Councillors are also under this misapprehension. For the year to March 2021, for which we are yet to see the Draft Accounts, the deficit will be greater.

    The story doesn’t just rest with the significant loss of value but look further at the borrowings and debt profile and the loss of rent received and Whois making good the cost of meeting the Business Rates on the empty properties in the Mall.

  2. Unfortunately for the residents the reserves are NEGATIVE £30 million, that is liabilities are £30 million more than assets. As of 31st March 2020, SHBC had borrowed £ 161 million and written down property assets £50.5 million. The Financial Statements for 2020-21, yet to be published, will show more red ink.
    As regards the market for commercial property in 2016, this was a newspaper article in the Camberley News and Mail in 2017.
    COUNCILLORS GET HIGH ON OPM

    Surrey Heath Borough Council went on a spending spree in November 2016 with other peoples’ money, borrowing more than £100 million to buy The Mall in Camberley. It made an unsolicited approach in August to the owners of The Mall, Capital and Regional plc. and paid £86 million. The Council spent a further £18 million on the House of Fraser building and £8 million upgrading the centre spending £112 million of council taxpayers’ money.

    Neither the Council nor the Conservative Party had proposed this acquisition. It wasn’t mentioned in Council literature or in material produced by the Conservative Party prior to the 2015 local elections. There was no mandate for this purchase.

    The Council’s reasons for the purchase were to get control of The Mall to improve the shopping experience and to replace lost funding from Central Government.

    Neither reason stands up to scrutiny. C&R had plans approved by the Council in May 2016 to invest £4.5 million on improvements. The Council is unsure what investment income to expect.

    “Council Roulette” was the lead article on 11th July 2017 in The Times. It said that a council-fuelled commercial property bubble was a bet with residents’ money in a weak market, made with scant expertise and no safety net should market conditions change and of the 350 local authorities, half have bought commercial property. It specifically drew attention to Surrey Heath’s “£86 million spend on a single shopping mall in Camberley.”
    There’s lots of evidence to suggest retail is changing. Evidence in early 2016 was that In the U.S. there are reports of ghost malls and Sir Charlie Mayfield, of the John Lewis Partnership and chairman of the British Retail Consortium said of the 270,000 shops in the UK, up to 74,000 could shut.

    The Council does not have in-house property management expertise but should have been aware of retail trends. Advice on The Mall purchase from property experts Montagu Evans cost at least £280,000 and in the financial year the council purchased The Mall paid them £728,000. Montagu Evans now manage The Mall.

    Another example of spending OPM “The new branding is all about putting what is unique and so special about Camberley back in to the town centre” said the recently hired property-marketing consultants Halogen.

    • It’s a bit like Groucho Marx refusing to join any club that would have him as a member. Councils should refuse to buy any property that a retail property investment company is willing to sell them…

  3. It is unfortunate that the quirkiness of local authority accounting results in a NEGATIVE being expressed as a POSITIVE in regard to the Reserves. Put simply £238M of liabilities at 31.3 2020 plays £207M of assets which converts into a deficit reflecting the appalling value destruction. Many Councillors have also been taken in and believe the circa £32M number. This cannot be sensible when they are making decisions about the way forward.

    It is difficult to understand what is going on but it is possible that the £18M spent on the House of Fraser is currently worth £1M.

    Of greater concern to residents should be the level of borrowing, the debt profile, the impact of rising interest rates, some of which must be factored in immediately, the rent being collected and who is responsible for the Business Rates for properties empty in the Mall.

    I don’t know how you excuse the misspeaking by the Leader.

    Edmond Bain.

    p.s. I sent something over earlier which was posted and then removed or lost.

  4. David, thank you for taking the time to lay this out in an easily digestible manner.

    If I read this and the subject matter was in fact centred around my football team’s rival club, and their complete ineptitude when it came to managing cash and assets, then I would certainly by experiencing bouts of schadenfreude, most likely chuckling to myself.

    Of course, if what’s so clearly described by yourself (above) was all about my own football club, then i would use emotive terms such as ‘embarrassed’ , ‘devastated’ and ‘heart broken’.

    However, we’re not talking about football clubs or any other sport. Instead we’re talking about the town in which I live, and you can therefore take those aforementioned emotive words and multiply them by 100.

    My fellow residents and I have been exploited by our council. In fact, let’s be honest about this and call it out for what it really is; we have all been scammed.

    • Your fellow residents have certainly lost about £1k per head, as far as the investments made by the council on their behalf. That’s each and every one of them, not per household, if my mental arithmetic is correct.

  5. Next time you read something in the press about the Government’s “levelling up agenda”, whose aim (insofar as you can identify one) is to improve governance and quality of life in the “north”, remember this example of levelling down in the South and ask yourself why anybody would want to be more like us.

  6. Thanks for setting this out, David!

    W.E.A.Bain said above:- “Of greater concern to residents should be the level of borrowing, the debt profile, the impact of rising interest rates, some of which must be factored in immediately, the rent being collected and who is responsible for the Business Rates for properties empty in the Mall.”

    I agree; I think this is the crunch point for the Council and residents – the debt raised in such a hurried and apparently chaotic manner was in retrospect far larger than it need to have been (and might have been more expensive than it need have been?). Do we know if the loan was acquired on fixed rate terms or are we exposed to rising interest rates?

    Regardless of that, what is clear is that it will not be possible to renegotiate the loan based on the current value of the underlying asset, so we are presumably stuck with the terms as they stand.

  7. A serious account of an incompetent, negligent and unaccountable local authority. More worrying is that their authority oversight [LGO] are well aware of SHBC performance. With reported oversight failures extending across departments and sadly signed off by Town centre Cllrs.

    Town Planning and Building Control regulatory oversight. Camberley Town centre’s uncontrolled and incredible conversion to a confused Dormitory Town, is further confused by a complete lack of professional [Grown up] Town Planning vision or oversight. I wonder who those in SHBC think they serve – certainly not CTC Owner Resident Rate payers. A Vote of No Confidence

  8. Many thanks David for updating in an easy to read account. So now although the lights are still on ..we are back to DIM again!..

  9. Like with most things at SHBC the situation is confusing as the Auditor has not signed off anything beyond 31st March 2019 and all the figures that have certainty are pre pandemic or contained in briefing papers for the Council.

    It would appear from the 2020 draft Accounts that total borrowing is £160M broken down £108M short and £56M long. Since then I think the debt is of the order of £178M. The assets are not worth this and therefore as set out by other commentators the Council is in negative equity.

    Recently £50M has been refinanced with a longer term of 40 years but this will add more than £1M per annum to the interest bill. Quite a chunk when it was recently disclosed that the rent receivable expectation for the retail properties will fall short by £2.5M.

    The deceit was that residents were told at the outset that all debt would be long term to match the nature of the asset but in order to boost the return the Council resorted to a trick to show how clever it is but in the long run it will spectacularly back fire.

    In respect of another post the current loss of value equates to £3,000 per household or thereabouts.

      • In respect of your earlier comment about the PWLB. If the Council had borrowed from the PWLB at the outset, as those who are interested in these things were told, it would have been fine and dandy. Long term debt at a reasonable price. BUT OH NO! SHBC wanted to be clever and play the market as most of the borrowing comes from other local authorities and being short term needs to be rolled over.

        The PWLB has now cut up rough and will not be a party to remortgaging, will not lend against assets acquired for income (a serious topic as the Council is misrepresenting the acquisition as being for regeneration when nothing has happened in 5 years and SHBC has no hand in the management) and the PWLB has recently dramatically increased the rate for borrowing as it can work out, like all residents, that it is being mugged.

        The Council, I suspect, will have to resort to the commercial lending market. The interest bill is only going one way.

        I will leave it to the readers to judge as to who will lend against the security of the Mall and other retail related assets. I think it will happen but it will a damned close run thing.

        Let’s see how the Auditor BDO assesses the situation, recognising that the Audit Committee Meeting of 26th July has been postponed.

        I am concerned that a bunch of people who have no business going anywhere near the notoriously tricky area of commercial property undertook a punt of close to £120M but it gets worse as it was done with borrowing in the name of the residents of Surrey Heath. Who thinks that if a mortgage company advanced a 100% loan and the value of the house fell to less than half the cost that the keys would be held by the homeowner rather than the mortgage company. It is a good job that there don’t appear to be any capital or interest covenants in the loan agreements. Things that are presented as being “too good to be true” often are and work out differently. We didn’t need to pay Avison Young £38,000 to understand this. It has been obvious to many for 5 years.

        The bins might continue to be emptied but at this rate the money is running out. To be continued. If only SHBC had stuck to what it is charged to do by statute, following the path of many other councils, who didn’t feel compelled to take duff assets off an all too keen property market.

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