ANALYSIS: Councils continuing to invest in risky commercial property

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Some councils are continuing to invest in commercial property to boost their day-to-day income, despite warnings that these investments are risky.

One recent example is Somerset’s four district councils investing over £200 million between them in commercial property, in order to fund front-line services.

The trend has been in train for some time now as ultra-low interest rates have enabled councils to borrow to buy these investments very cheaply.

Consequently, local authorities across the UK have been buying-up income producing commercial property, planning to use the rental income to make up for reduced grant funding from central government.

The problem for many of these investments has been that Covid 19 has had a dramatic effect on this rental income, in some cases reducing it to zero as major retail chains have gone into administration.

Empty stores

There are examples of councils investing millions into large department stores that now lie empty, and far from producing an impressive income stream, they have now become a liability, with business rates, insurance and security costs all falling on the owner – the council and in turn, the local taxpayers.

In the Somerset case, the four councils have invested taxpayers’ money into a range of investments, ranging from offices and warehouses to housing projects and business parks.

Granted not all of these investments have or will turn sour, but nevertheless the councils have been warned by property professionals that they are entering an unfamiliar field, where even with the best skill, judgement and expertise, things can easily go wrong. These investments in commercial property, especially in the current business environment, are highly ‘risky’.

Below forecasts

The Taxpayers’ Alliance (TA) has been warning for some time that some of these investments in commercial property are delivering yields which are well below forecasts.

The latest analysis by the taxpayers’ campaigning group reveals a ‘mixed picture’ for investments made by councils across the UK, even before the pandemic.

The group’s study found that Leeds, Shropshire, Buckinghamshire, Surrey, Runnymede and Woking councils all reported that rental income was well below what they expected when the investments were made.

According to the TA, Spelthorne council was the only local authority it selected that reported all investments were returning income in line with forecasts.

Harry Fone, campaign manager at the TaxPayers’ Alliance, has said: “While it can see some success, including keeping council tax down, there are no guarantees with any investment and ultimately it’s ratepayers that will end up footing the bill for underperforming portfolios.”

Cllr Richard Watts, chair of the Local Government Association’s Resources Board, in response to the TA’s comments, has said: “When making investments, councils need to follow strict rules and assessments to ensure they invest wisely and manage the risk of their investments appropriately. Investments are not only made to try and plug funding shortfalls but also to help contribute to local economies.

“Councils continue to face significant extra cost pressures and huge income losses as a result of the pandemic. The Government’s commitment to fund a portion of lost income from fees and charges is a step in the right direction but does not cover full losses, nor does it extend to commercial income losses.”

It has been reported that in the Somerset case, between the four councils in the county,  £202,427,000 has been invested in commercial property, to date. South West Taunton (SWT) Council in particular has intimated that it could invest significantly more in property over the coming 12 months, potentially outstripping each of its three neighbours.

Not all of these investments reside in the local area. Here’s a rundown of the council’s current investments provided by Wellington Weekly News:

• Wickes Extra, Birmingham – £9.81m
• Aztec West Business Park, Bristol (unspecified number of units) – £9.1m
• B&Q store, Ayr – £6.6m
• The Range, Halifax – £5.445m
• Mecca Bingo, Corporation Street, Taunton – £1.614m
• Roughmoor Enterprise Centre, Roughmoor Lane, Williton – £1.405m
• Blackdown Business Park, Scott’s Lane, Wellington (four units) – £1.308m
• The Arcade (formerly The Carousel or K’s), Warren Road, Minehead – £314,000
• Other investments (under £250,000 in value) – £1.577m

Martin Henwood, SWT Council’s corporate finance adviser has said: “We invest in a diverse investment property portfolio, both locally and nationally, with the intention of generating surplus income that will be spent on local public services delivered within the district.

“This is an essential response to significant reductions in government funding over recent years and further reductions expected in future, in order to meet our service delivery objectives and avoid service cuts.

“We plan to increase our investment by up to £100m by the end of 2021/22,” he confirmed.

Pic credit: Stephen Oldham | Flickr

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LATEST: Landlord faces £455,000 bill after Court of Appeal decision

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The Court of Appeal has overturned an earlier judgement by a crown court to reduce a landlord’s Proceeds of Crime Act confiscation order from £455,000 to just £270.

North London landlord Hamid Kamyab now faces having to repay the huge bill after a long wait.

The saga began in July 2007 when Kamyab bought a house on Llanvanor Road in Golders Green (pictured, above) for £612,500 to rent out as an investment property.

He contends the five-bedroom property was bought already converted into nine apartments but Barnet council disagreed and in 2010 served an enforcement notice requiring him to re-convert the property back to its original configuration.

Kamyab did not comply with the enforcement notice for three years and in February 2015 he was convicted of breaching planning regulations and fined £10,000 plus £10,000 legal costs.

Proceeds of crime

Barnet then brought a Proceeds of Crime Act confiscation order against Kamyab, arguing that he had benefitted from the property to the tune of £455,414.

But at the POCA hearing in December 2019 a judge reduced this to £270 ‘in error’ by misreading the original court summons served on Kamyab, the Court of Appeal has now said, and linking his decision incorrectly to a similar case in 2017.

Barnet then sought to appeal the original judge’s ruling, and this has now been allowed – a decision how the situation will be remedied will be taken at a later date.

Read more: What is the POCA 2002?

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Worst choice on record for placing cash deposits

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Moneyfacts UK Savings Trends Treasury Report data, not yet published, reveals that the number of deals available to savers has contracted to a record low, at a time when savers would hope to see a boom during ISA season. Average rates rest at record lows

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Double Tax Agreement on property sold in Cyprus?

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I moved back to the UK 7 years ago from Cyprus. I have dual citizenship for both countries. I bought a flat in Cyprus in 2003 where I lived until 2013 when I moved to the UK and moved into my partner’s house until today 2021.

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ADVICE: Robust referencing and regular visits vital amid cannabis farm boom

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The recent story of a Nottinghamshire landlord who tipped off police when he couldn’t gain access to his property, but could smell cannabis, serves as the latest reminder to landlords to carry out a thorough tenant referencing check and make regular visits to their property.

In this case, the police arrested two men after discovering a cannabis farm in the rental property, where some 200 plants were being grown and the electricity had been bypassed.

Following a nationwide boom in the illegal cannabis industry over lockdown, police have been urging landlords to carry out regular checks on their properties.

Leicester police report closing down at least one cannabis set-up every week, while Nottinghamshire Police have seen a rise of 280 per cent in cannabis plant seizures during lockdown compared to the same period last year.  

And nationally, police say that more than 90 per cent of cannabis farms are set up in residential properties. Rented properties, the police warn landlords, are particularly attractive due to the lack of paper trail, which means that they can’t so easily be connected to the gangs running the operations.

Steve Barnes, Associate Director at Hamilton Fraser Total Landlord Insurance, explains how landlords can make sure they are protected should they discover their rental property has been turned into a cannabis farm.

“Firstly, landlords should check that their policy covers malicious damage, as many don’t. Our premier policy offers protection against malicious damage by tenants and their guests, as well as loss of rent resulting from the need to carry out repairs. But for a claim to be successful, you’ll need to provide evidence that you did all you could to prevent the damage from happening in the first place.

Although carrying out regular visits and thorough referencing checks may be a bit more complicated in a pandemic, these figures highlight how important they are. If anything goes wrong, to make a successful claim you’ll need to be able to show that your tenant passed a full and robust four-point reference check and that you carried out regular inspections.

Our updated guide to tenant referencing contains all the information you need to know about referencing and what a four-point check involves.”

The police have appealed to landlords who suspect foul play to look in on their homes, at least from the outside, every three months, as this is about the time it takes for a cannabis plant to provide a yield. 

The tell-tale signs of a cannabis farm include a strong smell of cannabis, blacked out windows, excessive condensation, powerful lights, fluctuations in electricity bill and birds gathering on the roof as it is warmer than others in the street.

Find out more about the signs to look out for and the steps you can take to minimise your risk in Hamilton Fraser Total Landlord Insurance’s guide, The growing threat of cannabis cultivation for landlords.

Cannabis farms pose a real threat to landlords today – not only is the production and distribution of drugs often linked to more serious organised criminal activity related to drug dealing networks, as well as violence. But cannabis farms cause enormous damage to a property.

Cannabis can be extremely dangerous due to the fire risk, especially if people are living in adjoining properties. Hamilton Fraser Total Landlord Insurance has seen a rise in cannabis farms, in particular those that cause major fires within properties due to the rewiring of electrics and overloading of sockets from heat lamps.

Case study

“The landlord had been trying to contact the tenants to collect rent for the forthcoming month but was not receiving any reply. So they decided to drive past the property and saw the police removing bags of material from the flats,” says Melissa Choules (pictured), Senior Claims Technician at Hamilton Fraser Total Landlord Insurance.

“The police officers explained that the property was being used as a cannabis factory and made the property secure while they carried out their investigations.

“The tenants had caused extensive damage where they had used the bedrooms to grow cannabis. They had knocked down walls and made holes in the ceilings, rewired the electrics and reinstalled the plumbing systems. In this case, the landlord had completed full tenant reference checks and carried out regular property inspections.

“Because they had done everything they could to prevent this from happening and were able to provide evidence, the insurers paid out £25,000 for the buildings damage and £350 for loss of rent.”

The coronavirus pandemic may have made it more difficult to carry out referencing checks and property visits, but it has also caused a nationwide boom in cannabis farms. Landlords need to be aware of this and do all they can to minimise risks by making sure they have adequate landlord insurance, are carrying out robust referencing and regular visits to their rental properties. 

As a valued LandlordZONE reader you’re entitled to 20% off Hamilton Fraser Total Landlord Insurance’s policies, call the team today on 0800 63 43 880 quoting code LZ2021 or get a quote online in under 4 minutes. 

Pic Credit: Cannabis Urlaub via Flickr.

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ANALYSIS: Are warehousing investments becoming overvalued?

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That’s the question asked by some logistics Reit investors as rising demand for warehouse space over the past year has led to rising rents – and valuations.

Rising demand for home deliveries especially during the pandemic – a trend that had been building long before Covid hit – means that the demand for warehousing space has been rapidly increasing.

Logistics assets consequently are reaching new highs in value thanks to consistently growing rents and a recent Investors Chronicle (IC) article asks, has this now gone too far?

Shares in warehouse owners, property company landlords who have benefited from these structural changes in the market, have reacted positively from the market sentiment, so much so that some are now looking overvalued.

As always happens when an investment trend is clearly identified, investor demand increases, and over the past 12 months some of these investments now trade at premiums to their net asset values (NAV).

Real estate investors have been clamouring for more exposure to the logistics sector as retail and leisure has seen a rapid decline. Those investors seeking to capitalise on the rapid growth in ecommerce and a renewed drive by companies seeking to strengthen their UK based supply chains post-pandemic, and Brexit, are willing to pay higher prices for these assets.

New money is also being ploughed into new logistics sites and distribution centres and investment companies and property Reits see a long-term future in the sector.

Record year

According to the Real Estate Services Group, warehouse development is heading for a record year in 2021. The amount of new space under construction is more than double the amount completed in 2020, with most of that space pre-let to retailers and distribution companies.

Johnny Hawkins, UK capital markets partner at Knight Frank told the IC: “There’s a wall of capital trying to get in and there’s not that many that really want to sell. Investors have been attracted to secure income streams as demand for ecommerce has accelerated demand for warehouse distribution sites,” he said.

Clearly, investors are expecting asset values in this sector to go on increasing. Property specialist Reits such as Segro (SGRO) and LondonMetric (LMP) are now trading at premiums to both the last reported and forecast net asset values (NAVs).

Chief executive at Urban Logistics (SHED), Richard Moffitt, said the demand for the faster delivery of products has led to more companies widening their “distribution footprint”. “Everyone gets excited about Amazon, but the reality is what you see now is a structural shift in the way we now procure our goods,” he told the IC.

Real clamour

Moffit says the Reit has experienced “a real clamour” among tenants to extend leases over the past six months, as these companies seek to make their supply chains more sophisticated following the pandemic and uncertainty of Brexit. “They can see that if rents are going to be on the rise, they may as well lock in now to a longer lease.”

Increasing competition for this type of space is really benefiting landlords as it means that tenants are anxious to secure leases and are willing to settle rent reviews in advance of the due dates. Around 80 per cent of rent reviews have been settled in advance of the lease date, Mr Moffit says. “Sometimes a tenant can see that the evidence is getting stronger and they’re not going to move anywhere.”

In March 2021 prime distribution space was the only property type where asset values were rising, driving down investment yields to below where they were a year earlier, that’s according to Knight Frank data. The average prime logistics investment yields are new below those available on prime offices in the City of London.

As the structural decline in retail rents continues to accelerate, and the future demand for office space post-pandemic is still unclear, it becomes harder to find reliable sources of rental income beyond logistics. There is good reason to be bullish on the sector but there is also the danger that values get ahead of themselves.

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EXCLUSIVE: Landlords and agents reject MP’s furlough discrimination claims

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Landlords and letting agents groups have insisted their members shouldn’t be – and aren’t – discriminating against furloughed would-be tenants.

They have responded to a written question asked by Labour MP Paul Blomfield (pictured) about what assessment Housing Minister Christopher Pincher had made of the extent of landlords and private letting agents refusing prospective tenants in receipt of support from the Coronavirus Job Retention Scheme.

Pincher replied that his department didn’t hold this information but said there was no reason landlords or letting agents should be refusing tenants outright on the basis of being furloughed.

He added: “A letting agent is free to carry out any referencing checks within the law as they deem appropriate before accepting a new tenant. This may include income requirements or the need for a guarantor, depending on the decision of the individual landlord.”

No evidence

Propertymark insists it has not seen agents refusing prospective tenants on these grounds. Mark Hayward, its chief policy adviser, tells LandlordZONE: “References look into the affordability of the proposed tenant and then the agent will react to the contents of that reference; however, we’re not seeing any evidence at the moment that those tenants on furlough have been prejudiced against.”

Case by case

A spokesman for the National Residential Landlords Association adds: “Landlords and letting agents should not have blanket bans on specific groups of people being able to rent their properties.

“Each tenant should be considered on a case-by-case basis, with appropriate checks to ensure they can afford the rent. Where needed, making use of guarantors can be helpful in providing confidence to both the landlord and the tenant.”

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How to triple your rental profit with HMOs

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Tuesday 20th April

Join Simon Zutshi, founder of property investors network and Author of Amazon No 1 property best seller “Property Magic”, on this 90-minute live training all about how you can increase your cash flow.

If you don’t have any HMOs yet you must attend this free training.

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Licence Fees – Should I only pay an inflation linked increase?

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Hi Everyone, I am an HMO landlord for many years in Leicester. The local Authority who does a very good job and is very helpful in my opinion has increased the HMO fees for a licence from £650 in 2016 to £900 currently.

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Eviction figures from Generation Rent are ‘irresponsible’, says expert

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Tenants’ advocacy group Generation Rent has published figures that claim some 700,000 renters have been served with Section 21 notices during the pandemic.

This figure is extrapolated from a survey of some 1,000 tenants, of which one in 12 said they had been served a Section 21 notice during the pandemic.

Section 21 notices are used by landlords seeking to move back into a property or sell it, but also as the quickest way to evict tenants who have stopped paying their rent.

Generation Rent says that its poll, if applied to the UK rental market of some nine million people, would mean 700,000 people served such notices.

Its Director, Alicia Kennedy, says: “Renters have been waiting two years for the government to make good on its promise to ban these unfair [Section 21] evictions.”

Huge figure

But Paul Shamplina of Landlord Action says that, although such a huge figure looks good in headlines, it is very unlikely to be accurate.

Approximately 21,000 people according to official MoJ figures are evicted during normal years via Section 21 and Section 8 notices combined, so for this to increase to 700,000 over the past 12 months is highly unlikely even considering Covid related circumstances, says Shamplina.

“If this was true, then it would take years for the courts to clear such a huge backlog, during which tenants would not be evicted, rent arrears would back-up and many landlords would suffer financial meltdowns.

“It is irresponsible of campaigning organisations to bandy these type of figures around because it doesn’t help the debate about rent arrears and reform of the court system move forward.

“A more considered and evidence based study of the situation was outlined in the report “Beyond Section 21” which outlined the true picture and presented constructive analysis and suggestions on how to proceed.”

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