Written evidence submitted by Mr Sashi Mylvaganam and Mr Peter Simpson
This submission is made by Surrey Heath Borough Councillor and Leader of the local Liberal Democrat Councillors, Sashi Mylvaganam and by local Camberley resident Peter Simpson. The views expressed are their own and not representative of any party or group.
1. Executive Summary
1.1 This submission provides evidence of the need for greater caution by local authorities before they consider acquiring commercial property. Whilst there should be no absolute bar on authorities entering this field, their lack of expertise in this complex area can lead to considerable and undesirable risks. It is not, after all, their core business.
1.2 The case evidence provided is based on Camberley Town Centre. The Mall (re-branded The SQ in 2017) was bought by Surrey Heath Borough Council (SHBC) in November 2016 and the adjacent retail premises of House of Fraser and NatWest Bank was bought in January 2017 for a total of £104 million. In addition £8 million was spent on refurbishment. (In this submission "The Mall" will be used to mean all the above properties).
2. Key Facts:
3. Our Concerns
3.1 SHBC has no expertise in commercial property or the retail sector. It was advised on the purchase by Montagu Evans a property consultancy and it was this same company who was subsequently appointed to manage these assets, raising concerns as to the propriety and efficacy of the governance and risk management. We believe there was insufficient separation of interests in this matter (1); something which should be avoided in the future.
3.2 The process in acquiring The Mall was unduly secretive, going well beyond mere commercial confidentiality. In 2016 the Council constituted 40 Councillors of which 35 were from one party (Conservative). The Local Government Act 1972 was invoked to exclude the public from any debate or consultation on this matter when the acquisition of The Mall was discussed in Council meetings.
3.3 The purchase was announced to surprised residents only after the event. Since its purchase several attempts have been made under the Freedom of Information Act to obtain The Red Book Valuation, the document produced by Montagu Evans, all attempts have failed on the same “commercially sensitive” argument.
3.4 It is clear that mechanisms must be found to engage with local tax payers whilst still respecting the fundamentals of commercial confidentiality. Key information, especially the valuation, should be made available and efforts after the event to withhold such information - potentially seen, rightly or wrongly, as a cover up - must be challenged
(1) Misbehaving: The Making of Behavioural Economics is a book by Richard Thaler, economist and professor at the University of Chicago's Booth School of Business. He won the Nobel Prize for economics in 2017. The book builds on Thaler's work as a Behavioural Economist in trying to present an alternate viewpoint that humans bring along behavioural biases, are error prone, and are not always rational. A quote from the book “Sometimes the invisible handwave is combined with the incentives argument to suggest that when the stakes are high and the choices are difficult, people will go out and hire experts to help them. The problem with this argument is that it can be hard to find a true expert who does not have a conflict of interest. It is illogical to think that someone who is not sophisticated enough to choose a good portfolio for her retirement savings will somehow be sophisticated about searching for a financial adviser, mortgage broker or real estate agent. Many people have made money selling magic potions and Ponzi schemes, but few have got rich selling the advice “don’t buy that stuff".
4. The Transaction
4.1 In July 2016 C&R received an unsolicited approach from SHBC to purchase The Mall. It is believed that Montagu Evans suggested the acquisition to SHBC.
4.2 Montagu Evans was appointed by SHBC to produce a Red Book valuation in accordance with standards and valuation practice statements issued by The Royal Institute of Chartered Surveyors (RICS) Valuation – Professional Standards UK January 2014 (revised April 2015).
4.3 For clients and other valuation users these professional standards and valuation practice statements ensure: (a) consistency in approach, aiding understanding of the valuation process and hence of the value reported (b) credible and consistent valuation opinions by suitably trained valuers with appropriate qualification and adequate experience for the task (c) independence, objectivity and transparency in the valuer’s approach (d) clarity regarding terms of engagement, including matters to be addressed and disclosures to be made (e) clarity regarding the basis of value, including any assumptions or material considerations to be taken into account (f) clarity in reporting, including proper and adequate disclosure of relevant matters where valuations may be relied on by a third party.
4.4 Clause (e) is particularly of interest, “clarity regarding the basis of value, including any assumptions or material considerations to be taken into account.” Given what was known of the retail sector in early 2016 the Councillors should have been aware, and if they were not Montagu Evans should have made clear, the risks involved in purchasing these assets.
4.5 If Montagu Evans did advise SHBC to approach C&R then clause (c) regarding independence could be an issue. A quote from Richard Thaler's book The Making of Behavioral Economics. Many people have made money selling magic potions and Ponzi schemes, but few have got rich selling the advice “don’t buy that stuff".
4.6 There was probably a conflict of interest in the interaction between SHBC and Montagu Evans. Montagu Evans is a highly regarded and dynamic partnership of chartered surveyors and property consultants, according to their website. It would appear that they advised the Council on the purchase of The Mall as they are the only property consultants to receive fees in the period 1st January 2016 to 31st March 2017, according to the financial transactions posted on the SHBC website. They are also the company providing the Council with property management services before The Mall’s acquisition and were given the property management contract of The Mall once the Council owned the premises. As a matter of record Montagu Evans was paid £766,000 for the fifteen month period 1st January 2016 to 31st March 2017, of which fees in relation to The Mall totalled £285,000 and redacted fees, where the council thought the information was commercially sensitive were £144,000.
4.7 The purchase price of The Mall was £86 million. In January 2017 SHBC bought the House of Fraser and NatWest buildings, for £18 million. A total of £104 million.
4.8 SHBC financed the purchase with borrowings and its own reserves. As at the 31st March 2017, long-term debt was 16.9 Million and short-term £102.1 million, a total debt of £119 million. This was an increase in borrowing on the previous year of £101 million, representing the purchase of The Mall.
4.9 The vehicle used to purchase The Mall from C&R was a Jersey Property Unit Trust (JPUT) that had been established by C&R, presumably, for tax avoidance purposes. Montagu Evans advised SHBC to keep the structure, which would allow SHBC to benefit from the same arrangements as C&R.
5. The Current Situation
5.1 The latest Financial Statements for 2018-19, dated 31st March 2019 show that the investment in The Mall has been written down by £38 million to £66 million calculated by Montagu Evans on an estimated yield of 6.3%. BDO the audit company in their submission to the SHBC Audit and Standards Committee on 20th April 2020 commented that the valuation was “aggressive”. They were inclined to suggest that the yield should be 8 or 9%, which would further reduce the value of the asset by £23 million. They then said the current valuation of The Mall at 31st March 2020 would be “horrific”.
5.2 The financing is largely short-term, that is repayable within one year. Given the diminution in capital value The Mall does not offer sufficient collateral for a lender to take the risk of non-repayment, especially as PWLB repayments rank above all other council outgoings should SHBC default on their debt.
5.3 Though SHBC has improved The Mall and taken initiatives such as late night shopping and various activities to attract more people to shop there the footfall of 9.7 million at the time of purchase has fallen. Sadly a number of well-known and useful shops such as Halfords and Currys have consolidated their retail premises away from Camberley.
5.4 SHBC has failed in its objectives of making it a better shopping experience, attracting more people into the town and regenerating the town centre and to provide income for the council. It has spectacularly failed in this regard. The diminution in value has left a big hole in SHBC’s finances reducing the ability to be able to sustain the level of spending in the services they wanted to protect.
5.5 An illustration of why the NAO are right to raise concerns about the governance and risk management arrangements for investment activity in some authorities and in particular SHBC is a presentation made by the Chief Executive to the SHBC Performance and Scrutiny Committee on 17th July 2019. She attributed the decline in footfall recorded in The Mall at the time to a fall in Gross Domestic Product in the UK economy and a fall in retail sales. The Councillors on the Committee accepted this. Peter Simpson wrote to the Chief Executive challenging these assertions In the reply the Chief Executive produced a chart showing the percentage rate of growth of the UK economy each quarter, which had fluctuated over the period 2014-18, she confused the rate of growth with the actual growth of the economy which had enjoyed year on year increases. Retail sales had not fallen, they had risen over the period. Unfortunately for a retail landlord this increase in retail sales was being achieved away from the High Street by vendors on the Internet.
5.6 Improvements are being made to the High Street and A30 London Road frontage and are being funded by a grant of £3.5 million from the Enterprise M3 Local Enterprise Partnership and £0.9 million from SHBC. This scheme will make a positive difference to Camberley.
5.7 There remains acute gaps in commercial skills and, as importantly, the critical skills in being able to manage public expectations and the role of being a public sector body in managing a commercial property portfolio.
5.8 Long term risks have not been properly evaluated and are not being well managed. The necessary skills, experience and foresight continue to be lacking.
5.9 The Covid-19 crisis has accentuated the issues of a changing environment. The retail market has been hit hard and more widely the whole commercial property market. There has been a notable absence of contingency planning and SHBC is now exposed to financial, social and commercial risks well beyond the level that is acceptable.
6.1 SHBC’s role includes collection of Council Tax, Environmental Health, Public and Private Housing, Waste Collection and Recycling, Planning Applications, and some other areas. It is a small Borough Council with revenues of £47 million.
6.2 For property investments of £2 million or less the Council had delegated authority to a quasi committee, the Land and Property Board consisting of the Chief Executive, Chief Financial Officer and the Leader of the Council. The full Council approved property transactions after the transaction had been completed. This happened, as there was 35 Conservative Councillors out of a total of 40 elected representatives. By setting up The Land and Property Board the Councillors effectively abdicated their governance and risk management responsibility. The Board has now been disbanded.
6.3 Acquiring The Mall and its subsequent refurbishment allowed the Council to implement its local plan with the objectives of controlling and upgrading the existing shopping centre, making it a better shopping experience, attracting more people into the town and regenerating the town centre. The second objective was to provide income for the council, replacing grants previously received from central government with the aim of making a 2% return on investment after interest and loan repayments. This low return was justified, as the centre was not purchased purely as an investment.
6.4 The council could borrow the money to pay for The Mall from the Public Works and Loans Board (PWLB) as it was an investment in a local project. The council also borrowed from other public bodies and used the Council’s reserves to fund the acquisition. In total £101 million was borrowed.
6.5 Montagu Evans was appointed to manage the Mall. Councillor Vivienne Chapman (Con) remarked in reply to an email dated 15th February 2017 “The Council recognises that it does not have the internal expertise to run a shopping centre and has engaged a professional company Montague (sic) Evans to do this for them. Montague (sic) Evans runs lots of centres across the UK and indeed the centre still retains it's (sic) existing manager and on site team. ME are also giving strategic advice to the Council on all of it's (sic) regeneration".
6.6 C&R a property investment company held the long-term lease on The Mall, SHBC own the freehold.
6.7 After C&R had secured the tenancy of Patisserie Valerie early in 2016 it applied to SHBC for permission to invest £4.5 million to improve The Mall. The permission was granted.
6.8 An unsolicited approach to purchase The Mall was received by C&R chief executive, Hugh Scott-Barrett, in July 2016. On the sale he said "The disposal of The Mall Camberley, which originated from an unsolicited approach from Surrey Heath Borough Council, will put us in a strong position to recycle capital for growth. We will look to reduce leverage, invest in higher yielding asset management initiatives and take advantage of the increasing number of attractive new investment opportunities which we have identified."
6.9 Camberley is a town in west Surrey with a population of 36,000.
6.10 The town centre comprises the High Street with mostly independent shops; The Mall an undercover shopping centre with retailing chains in fashion, jewellery, pharmacy, personal care, banks, grocery etc and some independent shops; a wide pedestrian street, Park Street, between The Mall and another shopping/entertainment complex, The Atrium, featuring shops, restaurants, cinema and bowling alley; and the public face of Camberley to the North fronting on to London Road, the A30, a parade of derelict looking shops again mainly independents.
6.11 There is one marque store House of Fraser, now owned by Sports Direct. Allders, BHS and Woolworth all closed sometime ago.
6.12 Camberley is not well served by public transport. The train line operates between Aldershot and Ascot. It’s difficult to travel by road North/South to Camberley because the M3 cuts off the southerly route and the Royal Military College Sandhurst and Crown Estate, the northerly, making access difficult and inconvenient.
6.13 Camberley is a good local shopping centre for day-to-day purchases.
6.14 Within two miles of the town centre on one site there is a Tesco Extra store and a huge M&S, with Next adjacent to it and a Sainsbury’s superstore to the South.
6.15 There is retail competition from established town centres in Reading and Guildford, both of which boast major department stores, other retail and entertainment complexes. Farnborough, Fleet and Bracknell, all within a five-mile radius of Camberley, opened new or refurbished retail centres. Of the six town retail centres in the area Camberley ranks sixth.
6.16 There were several references to the difficulties retailers were facing at the time and their doomed predictions as to the future have come about. In February 2016, nine months before the council purchased The Mall, Sir Charlie Mayfield, then head of the John Lewis Partnership and chairman of the British Retail Consortium said “The retail sector employs three million people – a number that could fall by nearly a third in less than a decade as increasing costs and changes in the way millions of consumers shop take hold. People assume that somehow things are going to carry on as they are, when that’s unlikely. Of the 270,000 shops in the UK today, up to 74,000 could shut”. James Timpson, of Timpson’s, said “Key cutting is like getting your haircut, difficult to do online”. Continuing he says “Outside London rents are coming down and down, in suburbs of industrial cities rents are halving. If you’re a landlord it’s horrendous”. Lord Oakshott commenting in July 2017 “Many (shopping) centres will end up obsolete and have to be knocked down".
6.17 The Internet has changed the way people shop and the trend was evident four years before SHBC purchased The Mall. The value of on line retail sales for 2012 was £33.24 billion and in 2016 they had nearly doubled to £60.43 billion and in 2019 the value had risen a further 26% to £76.04 billion. (source Statista 2020). This trend should have alerted SHBC to the risks involved in purchasing a retail shopping centre.