Agenda item

Property Report

To receive a review of a Council owned asset, as requested by the Committee.

Minutes:

The HLS introduced the report and informed Members that the Estates Manager (report author), was unable to attend the meeting. She suggested that it might be useful for new Members to understand some of the context of the property, and reported that the associated Itteringham Shop had been in the village since 1637, and had been community run since 1994. It was stated that the shop had changed hands in 2012 with the sale of Fairmeadow House, as it was considered to be part of the same property. Under new ownership, the HLS reported that the five year lease on the shop was due to be terminated upon its expiration in March 2017, allowing six months for the shop to vacate the premises. She added that the shop was subsequently listed as an asset of community value, as a result of significant public concern regarding potential closure of the shop, bearing in mind its history. It was reported that the owners  would not sell the shop separately to the community association (ICA), and as a result the ICA started fundraising to buy both properties. The HLS noted that due to differences between the owners and ICA, the latter approached the Council for assistance, and various options were considered. The HLS reminded Members that the issue was time limited, and that the Council had been involved in the process at a late stage. As a result, the HLS reported that in order to safeguard the shop, Members and officers felt it was right to intervene to give some security to the ICA. The HLS noted that purchasing property in North Norfolk was not deemed to be a high risk investment, an at that point a business case was developed for the neighbouring  Fairmeadow House to be converted in a holiday let, and a subsequent report proceeded to Cabinet. She added that following the purchase, the shop had remained in the premises under a lease, with the potential for the ICA to buy the shop in the future.

 

Questions and Discussion

 

The Chairman thanked the HLS for the introduction, and offered Cllr S Bütikofer the opportunity to speak.

 

Cllr S Bütikofer stated that she wanted to add some further context for new Members, and noted that the purchase had been brought to Committee by the previous administration at very short notice. As Chair of the Overview & Scrutiny Committee at the time, Cllr K Ward had given her permission for it to be an item of urgent business. As the Leader of the Opposition at the time, Cllr S Bütikofer stated that she had expressed concerns regarding the purchase, and though supportive of saving the community asset, stated that she had reservations about the purchase of Fairmeadow House. She added that she believed that the shop should be separated from Fairmeadow House, and that the house should be sold on.

 

The HLS stated that occasionally urgent items would come before Cabinet and it was reasonable to make appropriate use of this provision. It was noted that in this case, there had been a need for urgent action as the situation was particularly time sensitive. The HLS stated that it was appropriate for Members to take a different view of the projects of another administration, but suggested that Members needed to ensure that an objective was maintained. She added that extensive discussion had been held on risk appetite, and that nothing the Council did was without risk. It was suggested that the Committee should take a measured approach to the report, to determine how the asset has performed, to review it, and to learn from it.

 

The Chairman stated that the purpose of the report was to consider what has happened in respect of the project, and contribute to the options, so that Cabinet can  consider any actions.

 

Cllr P Grove-Jones noted that the risk training provided had been interesting, and suggested that if the asset was not profitable, then sale should be considered.

 

The HFAM began by referring Members to the report, which noted that the key objective of the purchase was to save the community shop. He added that the property would likely also prove to be a good investment over time, though this could require some patience. One of the initial lessons learnt, was that the Council had to be clear on the key drivers for projects, and had to better understand how to measure project outcomes. The HFAM reported that initial projections had considered how quickly the letting business would build, though this may have been optimistic. He added that income in the second year of operation had more than doubled, but this had come with an associated increase in costs. It was anticipated that income would continue to increase, but it would take time to build a customer base.

 

In terms of yield, the HFAM stated that the property would need to be run in more business-like manner, by maximising income and decreasing management costs. In relation to this, it would be possible to have a separate profit and loss account for the project.

 

Feedback on the property was reported to be positive, but the HFAM warned that the Council may be spending too much to achieve this. In terms of the properties facilities, it was noted that it slept eight, but only had two toilets and one shower, which could discourage potential bookings.

 

On property value, the HFAM reported that three valuations had been received, which ranged from a £170k loss on the original investment, to a £70k gain. There was provision for improvements to the property, such as improvements to the annex, or the installation of additional washing facilities, but these would be subject to a business case. Additional opportunities also included separating the property from the village shop.

 

A comfort break was taken from 11.15 – 11.25

 

The Chairman informed Members that the original request for the report had been made by Cllr J Rest, and he would be invited to explain his reasons for the request. Cllr J Rest stated that he believed that the project had been processed without prior review, and that it was now appropriate to consider disposing of the asset at the best market value available.

 

The Chairman stated that the Committee needed to take an objective look at the project, and use the information included in the report to develop informed recommendations. It was noted that the original business case may have been overly optimistic, and this needed to be taken into account for future commercialisation projects. The HFAM replied that whilst the project hadn’t produced some of the financial benefits expected, it had still delivered the key objective of saving the community shop. In terms of a fall-back position, he added that there was always the option to sell the asset, though the outcome could vary depending on the timing of the sale. In reply to the Chairman, the HFAM stated that the business case had been  optimistic about the letting market, but there were still constraints on the property that could be limit its potential, such as limited bathing facilities. It was suggested that ideally, the project needed time for the income develop and to achieve maximum capacity.

 

The HFAM stated that future projects would still pose potential risk, but lessons had already been learnt from the business case. He added that to Fairmeadow House, income had still almost tripled, and it was now time to reduce management costs. It was suggested that potential options to consider could include greater involvement from the ICA, or a pricing review. The HFAM noted that changes such as allowing dogs had led to substantial increases in lettings, which showed signs of movement in the right direction.

 

The Chairman asked if it was fully understood at this stage, what had gone right and wrong with the project, to which the HFAM replied there was certainly more to learn, but significant lessons had been learnt. The HFAM added that the national average for return on commercialisation investments was 2.2%, whereas the NNDC target was 4%. As a result, the question should be asked whether the Council could accept a lower rate of return to achieve other outcomes. The Chairman asked whether these considerations would be material in informing the decision that needed to be made, to which the HFAM replied that they not provide significant input at this stage. He added for example, that the Egmere proposal had never been expected to generate significant returns, but was intended to generate economic development within the district. It was suggested that the utopia project would tick off all corporate priorities, but this was not always possible.

 

The HLS stated that upon revisiting the original report, the key objective had always been to save the community shop, and whilst it had been assumed that the ICA would offer more support to run the house, this was somewhat beyond the remit of the group. Other risks were identified in the report, such as the potential for lower than expected income, and increased maintenance costs, and Members made the decision at the time with these risks in mind. The HLS informed Members that she had personal experience of running a similar property, and suggested that the focus needed to move to yield rather than occupancy, and for this reason it would be worthwhile reviewing the pricing structure. Further options could include reviewing the management and cleaning operations to seek a reduction in costs. The HLS stated that there were three elements that improved the appeal of properties to potential renters, which included hot tubs, log burners and proximity to beaches, of which the first two could be considered.

 

Cllr N Pearce stated that in hindsight, it was possible that mistakes were made, but efforts should now focus on maximising the profitability of the property. He noted that the project did save the community shop, which was the key objective and should be remembered as such. It was suggested that as it was the wrong time to sell, the property should be given two more years to establish itself, and after that point a decision can be made on its future. At this time, Cllr N Pearce suggested that the shop should be separated and appropriately transferred to community ownership.

 

Cllr T Adams stated that he had previous experience of the holiday let sector through the running and cleaning of properties. He stated that he did have concerns regarding the timing of the investment, and would like to know whether NNDC employed local individuals for cleaning and maintenance. Cllr T Adams noted that the destination of the property limited its appeal in comparison to coastal properties, and suggested that consideration should be given to selling the property.

 

Cllr P Grove-Jones stated that under normal circumstances a business would be given three years to make profit, after which time the business would need to make profit or cease trading, and this should be no different.  

 

Cllr P Heinrich stated that his gut reaction would be to sell the property, but doing so at this time could lead to a loss. Therefore, he suggested that this should be revisited in the future, and in the meantime, consideration should be given to reviewing management and cleaning costs, and making significant improvements to the bathroom facilities, as this could improve the saleability of the property in the future.

 

In reply to comments regarding conversion of the property’s annex, the HLS replied that this would be difficult, as it had poor access and would be unlikely to gain the necessary planning approval for conversion into a separate dwelling. Cllr P Heinrich asked whether it would be possible to develop a business case for the conversion of the annex. Cllr E Spagnola suggested that two beds with a ceiling hoist would enable the annex to be put to greater use. Cllr W Fredericks added that the annex could help the property appeal to a niche market. She then asked if the property could be offered for long term rental, and if sold, whether the money would be returned as capital. It was confirmed that it would be capital if sold.  Cllr L Shires replied that there was likely a very limited market for five bedrooms houses within North Norfolk rental market. She added that the project had been a valuable learning experience for the Council, and  agreed that whilst now was not the time to sell, the property should be given a chance to develop.

 

The HFAM informed Members that the property was currently managed by English Country Cottages, and the cleaning was carried out by Norfolk Cleaning. He added that there had been two significant elements of capital expenditure on the property, which included the installation of a bunded oil tank, and a new septic tank at a cost of £28k. It was reported that this initial expenditure had frontloaded the property with significant costs, though these were one-off and would not be incurred again. The Chairman suggested that this showed that some issues may have been overlooked during the property survey. He then asked if these costs were outlined in the report, to which the HFAM replied that they were included, but not specifically mentioned. He added that surveys of the property had been undertaken, though septic tanks were often overlooked. The tank was reported to have sprung a fundamental leak one and half years into ownership, and new regulations required certain investment. It was noted that property surveys were a requirement of purchase, but they did occasionally miss things.

 

Cllr H Blathwayt stated that he agreed that the business should focus on yield rather than occupancy, and as a result, the pricing structure should be reviewed. He added in terms of tenancy, that if a future sale was possible, then the property should remain as a holiday let enable an easier sale. It was noted that losing money on property in North Norfolk would be very difficult. Cllr H Blathwayt suggested that the property business should be allowed a five year run to establish itself, subject to a pricing review, and added that if the annex could be used as an accessible holiday let, this would be a positive step.

 

Cllr J Toye stated as local Member that he had to reinforce the importance of saving the community shop, and added that he agreed that the property needed two more years to reach its full potential.

 

Cllr A Brown stated that he agreed that a business case should be considered for the conversion of the annex into an accessible holiday let, but noted that this could be compromised by its limitations. The HLS noted that these issues would only be relevant if the intention were to let the annex separately from the man property, but if the property were to be let as one, then this would not be an issue.

 

The Chairman noted that a majority of Committee Members appeared to agree with the officers recommendations of continuing to run the property as a holiday let for a further two years. In addition it had been suggested that a review of the lessons learnt should be undertaken, alongside a review of property management, cleaning, and pricing. Finally, it was suggested that improvements such as additional bathroom facilities or the conversion of the annex into an accessible holiday let should also be consideration. Cllr L Shires proposed the recommendations and by Cllr P Heinrich seconded.

 

RESOLVED

 

To recommend to Cabinet:

 

1.    That the Council continues with the current holiday letting of the property for a 5 year period, starting from the date of purchase, to allow the business to prove itself as either economically viable, or to reach a point at which sale of the property would be financially advantageous.

 

2.    That action be taken to identify lessons to be learnt from the underperforming holiday letting aspect of the venture, so that they may be recognised and used to inform decision making on future commercial projects

 

3.    That interventions be made to improve the arrangements for managing and running of the property to minimise costs, maximise occupancy and improve efficiency.

 

4.    That consideration is given to making a range of potential improvements to the property to increase its market appeal, which could include making it fully or in-part (i.e. the Annex) DDA compliant, and/or installing additional bathing facilities, to improve financial viability.

 

5.    That a review of the pricing structure is undertaken by the Assets Team to improve occupation and yield during peak, mid-season and off-peak periods, to improve financial viability.