Spelthorne seals £360m sale-and-leaseback deal with BP
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BP campus, Sunbury-on-Thames. Photo: BP
A South East borough council has completed a property deal worth around £360m, income from which is expected to almost entirely plug the forthcoming loss of its revenue support grant.
In what is being described as the biggest commercial property deal ever undertaken by a UK local authority, Spelthorne Borough Council has purchased the BP campus in Sunbury-on-Thames and will rent it back to the energy giant.
The council is understood to be in line for income after interest payments of around £3m a year from a 20-year lease agreed after BP conducted a competitive process for a sale-and-leaseback deal.
Spelthorne’s deputy chief executive, Terry Collier told Room151: “For a council of our size, the rental we will receive is very important. Three years ago we received £2.5m in RSG and by 2019 it is expected that will become a negative payment we have to make of around £750,000. This deal roughly offsets that amount.”
Figures from the Debt Management Office show that Spelthorne borrowed £377.5m from the Public Works Loan Board at the end of September.
The cash, which made up almost 70% of the total £547.7m lent by the PWLB last month, will fund the deal
BP Sunbury-on-Thames
and pay for related expenses including stamp duty.
Spelthorne’s borrowing is made up of 50 separate loans stepping up in yearly lengths, meaning principal repayments increase each year, while interest payments fall.
The council has secured its one-year loan at a rate of 0.83% with the 50-year tranche to be paid at 2.08%.
David Green, client manager at Arlingclose, the council’s treasury adviser, said: “Due to the PWLB’s methodology for calculating annuity rates, the blended interest rate on the 50 maturity loans is between 0.11% and 0.26% a year cheaper than on a single annuity loan.
“On a project of this size, that is nearly a £1m saving in the first year alone.”
Collier said that the council was looking at other property purchases to help the council become self-sufficient.
He said: “This deal is a sign of the times – a reflection of the need to put themselves on a sustainable basis in response to funding cuts.”
Other councils wishing to embark on similar property deals need to be “prepared for the sheer level of work involved”, he added.
“You need to be supported by professional experts and do due diligence to understand the transaction and the strength of the tenant. You also need to be able to respond quite quickly during the bidding process.”
Councils are increasingly taking advantage of the low interest rate environment to fund property purchases aimed at generating income.
However, two weeks ago, credit ratings agency Moody’s warned that borrowing to fund commercial ventures was likely to have an “adverse impact” on local authority credit profiles.
Green said: “Local authorities considering similar schemes will need to compare the risks and rewards against other options.
“There will be financial and maybe also economic development rewards of buying a property, but these will be offset by the costs of interest payments and minimum revenue provision as well as regular landlord’s costs.
“Risks include falls in property values, vacancies and default by tenants – after all, interest and MRP will still be charged even if the site is empty.”
He said many authorities are therefore opting for pooled property funds instead, which can be a lower risk alternative to achieve similar levels of net returns.
The BP campus is the largest privately owned office park in the UK and is currently home to approximately 3,000 employees.
The site comprises 11 office buildings providing 620,000ft2 of accommodation, with surrounding land and car parks.
