Council continues to build for the future with investment in Somerset branch of B&Q

06 September 2019 | District

A top performing branch of DIY and home improvement brand B&Q has become the latest investment for South Somerset District Council.

The Glastonbury site has been acquired for £4,405M as part of the Council’s commercial strategy. The aim is to invest in a diverse range of assets and generate income which will mitigate a reduction in central Government funding.

It will also ensure SSDC can protect the wide range of services our communities receive.

Details of the deal

A top performing branch of DIY and home improvement warehouse B&Q has been acquired for £4,405,000, reflecting a net initial yield of 7.19%. Acquisition advice was provided by retail warehouse specialist Ellie Kirkby at Avision Young and the legal work undertaken by Paul Longman, partner at regional law firm Trethowans.

The property is a 27,000 square foot retail warehouse, with 8,000 square foot external garden centre and 4,000 square foot secure delivery yard. It has been tenanted by B&Q since its construction with an unexpired lease term of seven years.

The Council undertook substantial due diligence, mindful of current difficulties within the retail market. But the store has performed well since opening in the early 1990s while the lack of competitors locally and lack of retail warehousing in the town made the investment opportunity attractive and able to pass the Council’s strict investment criteria.

The property was also purchased with an eye on the future development of part of the car park, which will allow income and capital value to be maximised.

The Council’s portfolio holder for economic development including commercial strategy, John Clark, said: “While it is out of district, this store is one that we know well and one that we consider to be shielded from the general malaise that has hit retail warehousing.

“This investment is the latest success in achieving the aims of our commercial strategy, which is focused on generating income to secure the provision of public services. We are pleased to report we are on target to meet our commercial targets.”

Ellie Kirkby added “This should prove to be a solid investment for South Somerset Council. The unit is let at a reasonably low rent, and the lack of other major DIY provision in the town, coupled with a distinct lack of retail warehouse supply, makes this an attractive and relatively rare investment opportunity. In addition there are asset management opportunities for the council to add value here.”

How does the council pay for these deals?

The Council uses a range of funding sources including investments utilising its reserves (sums of money that are held so that there is a financial cushion to meet sudden unexpected costs) and internal borrowing, a process through which SSDC can borrow from itself and charge itself interest.

This means that money that was previously in bank accounts is generating a higher rate of return with the proceeds used to protect services and deliver important projects in South Somerset. It does not involve investing money that would have been spent on services.

And in the highly unlikely event that we do need to access to funding quickly in an unplanned way, our careful approach to investment means we can still do this.

FURTHER BACKGROUND AND CONTEXT

Why is South Somerset District Council becoming more commercial?

The Council is currently operating in a complex financial climate where it needs to deliver savings rising to £6 million per year until 2022. This is in addition to having to cut its costs substantially since 2010.

SSDC has sustained a 70 per cent reduction in its Government grant funding since 2010 and further reductions are likely in the future whilst demand for and costs of many services continues to rise. It became clear that SSDC needed to make the most out of its assets and look for new opportunities which could generate income to protect the wide range of services our communities receive and create opportunities to fund new projects.

It has seen the Commercial Services and Income Generation team given an ongoing annual income target of £2m for commercial investment income and great progress is being made.

This is about making prudent financial decisions which will create significant income to get the best results for South Somerset but still, where possible, supporting the local economy.

In the future, we will have countered the loss of grant funding from Central Government though sensible investment and we will continue to deliver vital services, parks and open spaces as well as exploring new opportunities to make South Somerset an outstanding place to live, play and work.

How does the council decide on where it invests?

Every decision that is made is being rigorously tested and checked. The Commercial Property Team is working to ensure that SSDC does not overpay for property due to the lack of supply, and is not exposed to undue risk, for example within the retail sector, where significant changes are currently occurring nationally.

A huge and diverse range of opportunities have been considered and rejected in the past year from a car showroom in Newcastle to an industrial estate in Poole.

Reasons for rejection can include the asking price not matching our valuation, unacceptable risk to income, non-compliance with our commercial aims and objectives, and over-exposure to a particular market.

SSDC is investing in a diverse range of locations and asset types to ensure that it spreads any risks attached to investments which reflects sound investment practice.

This includes assessing whether an investment outside the district will deliver a better rate of return for our communities than a similar opportunity in South Somerset.

The new asset forms part of South Somerset’s growing portfolio, which includes High Street retail, in town and out of town offices, industrial, energy storage and a residential development site.