Hertsmere Developments Limited Non-confidential elements of Business Plan 2018 2028 - Hertsmere Borough Council
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Hertsmere Developments Limited Business Plan 2018
APPENDIX D
Hertsmere Developments Limited
Non-confidential elements of
Business Plan
2018 - 2028
This document sets out a proposed business plan for Hertsmere Borough Council’s (the
Council’s) wholly owned property company, Hertsmere Developments Limited (HDL) for the
development of, and investment in, property and wider investment opportunities.
1|PageHertsmere Developments Limited Business Plan 2018
The business plan is described within the following sections:
Section 1 – Context and Purpose – The Vision and Objectives of HDL.
Section 2 – Company Structure & Board – Summary structure, including how HDL will interact
with the Council, its subsidiaries and the market, the principles behind its funding and
operation.
Section 3 – Company Staffing & Resources – Summary of company staffing/resource structure
and how this will be deployed to meet the objectives.
Section 4 – Funding – – Detail of the funding approach for HDL.
Section 5 – Company Activities – Detailing the Activities of the company including the property
investment and development strategies.
Section 6 – Financial Analysis – Financial analysis including Baseline Business Plan highlighting
the financial position of the Company and impact on the Council’s accounts Redacted due to
commercial sensitivity
Section 7 – Sensitivity and Scenario Analysis – Examining the impact of variations in key
assumptions and a variety of market scenarios Redacted due to commercial sensitivity
Section 8 – Risk Management – Highlighting and assessing key risks to meeting the objectives
Section 9 - Future Activities – The longer term strategy for the Company
Appendices
Appendix A – Activity Income and Expenditure Redacted due to commercial sensitivity
Appendix B – Business Plan Assumptions Redacted due to commercial sensitivity
Appendix C – Investment Types/ Areas Redacted due to commercial sensitivity
Appendix D – Site Phasing Redacted due to commercial sensitivity
Appendix E – Governance Agreement
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1. Context and Purpose
1.1. This section will provide context for why the Council took the decision to establish HDL and
will articulate the Vision and Objectives of the company.
Background
1.2. In February 20151 Hertsmere Borough Council (the Council) began investigating the potential
to establish a Wholly Owned LA Property Development Company. This decision was taken as
a result of three major drivers for the Council
Firstly, to help address the significant housing crisis that is facing the country at large,
and Hertsmere specifically. Review of the Society of Local Authority Chief Executives
report on housing demand ‘Addressing the Housing Challenge’ (October 2015)
identified access to housing and affordability as a key issue for LA’s. Key elements of
this report focussed on the need for the public sector to “step up” and deliver
significant housing development. The Council believed and continues to believe HDL is
the best vehicle to address this.
Secondly, the desire of the Council to drive economic growth in the local area by
enabling a faster pace of development of the Borough’s land. Historic land banking and
slow pace of development is an issue that the Council wished to address; and
Thirdly, the significant financial challenges facing the Council over the medium to long
term. The need to become financially self-sufficient is a driver for much of the Council’s
activity and the significant potential to generate additional income from its asset base
is seen as a prime driver of this goal.
1.3. These factors coupled with an emerging consensus that local government and business
needed to innovate and unlock new ways of developing property led to the Council
investigating solutions for a Wholly Owned Company (WOC).
1.4. In investigating these solutions, it became clear that the Council occupies a unique position
in this market as a result of:
The Council’s knowledge of the local regional market and stakeholders;
The land the Council currently holds, and the related opportunities associated with this
land;
The Council’s access to low cost borrowing;
The Council’s ability and willingness to take a longer term return than other
developers/ investors active in the markets; and
The Council’s existing skills and expertise in property.
1 th
Report to Executive, Document Reference O/15/03 – 9 February 2015
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1.5. As a result, the Council elected to begin to establish a WOC with the expressed aim of
assisting the Council to deliver its regeneration, housing, financial and commercial
objectives. These were articulated in some details in the following set of strategic objectives
for the approach:
Revenue generation – in order to achieve financial self-reliance and sustainability one
of the key drivers for the Council was to secure an ongoing revenue stream to support
the General Fund and this was the preference over obtaining capital receipts through
land sales.
Mixed use development – i.e. to deliver both residential and commercial development
opportunities. Commercial development opportunities would not only provide much
needed economic regeneration but also enhance business rate retention for the
Council.
Residential development which would provide a mix of tenures including low cost
home ownership, affordable rents and private rent and not require the re-opening of
the Housing Revenue Account (HRA)
The use of surplus Council sites with the Council retaining a freehold interest.
Benefits of a Wholly Owned Property Company
1.6. The Council decided in December 20152 to establish Hertsmere Developments Limited (HDL),
a WOC targeting property investment and development. The benefits of doing so include:
The ability for the WOC to invest in, and develop, a wide range of asset types in order
to further the Council’s economic development agenda and generate financial returns
to the Council;
Potentially greater speed than the market at large in undertaking property investment
and development activities;
Profits from the company can be returned to the Council’s General Fund via returns on
loans and dividend payments
Development of realisable capital assets; and
Opportunity to procure services from within the Council and its other subsidiaries,
businesses and stakeholders.
2 th
Report to Executive, Document Reference EX/15/30 – 14 December 2015
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Market Analysis
Other Council Property Companies
1.7. Over recent years a number of Councils have established property vehicles, similar to HDL.
This is clearly demonstrated by the recent Smith Institute report “The Rise of Local Housing
Companies”3. The key reasons for this trend echo the objectives the Council has for its
vehicle.
1.8. Some examples of property companies and specific housing development and investment
WOCs that have been established include Brick By Brick, the WOC for Croydon Council, Be
First LB Barking and Dagenham’s company, BexleyCo, LB Bexley’s new property investment
vehicle, Eastbourne Homes Limited, Eastbourne Borough Council’s vehicle and a variety of
vehicles owned by LB Barnet, South Cambridgeshire, Wokingham, Broxbourne, Newham,
Sheffield, Greenwich, Ashford, and Enfield.
1.9. These vehicles vary in size and objectives and invest in and deliver a variety of property
types. Options include:
Purchasing existing properties and renovating them for various uses;
Purchasing existing income generating assets;
Investing in property funds;
Purchasing vacant land for development from the market;
Purchasing land to achieve planning and realise the planning gain;
Developing on existing land, as an agent of the Council;
Purchasing land from the Council; and
Utilising Council land as equity investment into the vehicle for development.
1.10. Each of these activities have been considered in developing the scope of the roles to be
undertaken by HDL in shaping this business plan. The conclusions of this exercise are
articulated in Section 6 – Company Activities.
3
The Rise of Local Housing Companies – The Smith Institute October 2017
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SWOT Analysis
1.11. In order to understand the environment in which HDL operates a SWOT analysis has been
undertaken. This is a process to identify the Strengths, Weaknesses, Opportunities and
Threats that exist in HDL’s market. It examines the internal and external factors that may
affect HDL’s future performance over the course of the business plan.
SWOT analysis
Strengths Opportunities
Delivers economic benefit to the areas in which Potential to bring in private investment.
HDL invests / develops. A company ‘light’ approach provides for a slim,
Meets demand not being addressed by the private low cost organisation
sector both affordable and market rent Provide skills transfer / diversification through
Developments will provide a variety of tenures – company activities
PRS, Market Sale etc. Wider options for raising new/additional
Increases housing supply in the Borough. funding.
Potential ability to access Homes England and Can make better use of existing Council assets
other external funding. (land, buildings and cash).
Being wholly owned the Shareholder retains Company can be utilised for other ventures the
control through the Governance Agreement as Council may pursue.
well as within the parameters of the business plan. Potential to deliver a variety of uses – housing of
The approach enables the potential to borrow different tenures / commercial / energy etc. and
against the assets. meet other needs e.g. Temporary
Generates income to the Council’s General Fund Accommodation
through a combination of investment income and Potential to expand
profits. o Within Hertsmere
Council’s liability limited to the funds invested and o Across South East
. anticipated returns from those funds invested, o Across country and overseas
interest and profit Potential partnership approaches
Reputational benefits / credibility through RICS o With other Councils
regulation o With Central government
Freedom and flexibilities to act commercially. o With private providers.
Could utilise expertise and experience and Non-
Exec Directors from private sector
Diversifies housing provision delivery approaches
Ability to invest outside Borough boundaries
Weaknesses Threats
WOC is liable to corporation tax payments Lack of land for future expansion.
Challenges in achieving balance of work for Market demand and any reduction in yields,
company / Council. sales and rental values
Costs to establish and run the company – legal / Demographic changes
financial advice, external audit fees, registrations Legislative changes which could be unfavourable
with HMRC and with Companies House / annual to the WOC.
overheads and running costs Increases in interest rates and/or reduction in
Liable for cost of maintenance to assets rate of returns for the Council.
purchased. Potential capacity of Council staff to deliver
services to the company
Competition from other property companies
Increasing market construction costs when
developing.
Supply chain availability.
Potential illiquidity of the assets acquired
resulting in inflexibility in the asset base.
RICS regulations for money Laundering etc.
Fraud
PWLB loans may not be available for the Council
to lend to the wholly owned subsidiary.
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1.12. This analysis clearly shows a number of opportunities and challenges for the Company. The
most pressing overriding factor for the company is the level of reliance it has on the Council.
The relationship with the Council and the Company’s reliance on it for supply of land and
funding make the agility and support of the Shareholder crucial for the Company to succeed.
1.13. The SWOT analysis was closely reviewed by the Board and helped shape the following Vision
and Objectives for the Company.
Vision and Objectives
1.14. The Company has developed the key elements of its Vision in a Directors’ workshop and has
agreed them with the Shareholder representative, Hertsmere Borough Council.
The Vision is set out below:
“Hertsmere Developments Limited (HDL) is a development, investment & management
company that delivers a portfolio of housing, and commercial property, to support the
Council’s growth and economic development agendas.
The company will act commercially to generate financial returns for the Council whilst
respecting the housing and other priorities of Hertsmere and the values of the Council.”
1.15. From this definition, a set of strategic objectives for HDL have been developed
collaboratively by the Board and senior officers. The resultant set of twelve objectives are
detailed below:
Objectives
Develop / Invest in a portfolio of assets that
- delivers an appropriate return to the Council, as shareholder, to be agreed on an
ongoing basis;
- balances risk and reward across the portfolio;
In developing / making investment decisions be cognisant of:
- the potential to reduce long term costs and risks to the Council as shareholder;
and the Council’s economic development agenda;
To develop and utilise a series of approaches that are consistent with the Council’s
corporate strategy whilst maximising income return;
Undertake housing development to facilitate meeting housing need in the Borough
whilst delivering policy level affordable housing, unless extraordinary conditions prevent
this
Housing development will only be undertaken within the Borough in the initial Business
Plan.
Commercial property development and other property investment can be undertaken
both inside and outside the Borough to contribute to the overall financial return
To undertake co-investment with public not for profit and private sector partners as
appropriate;
Dispose of existing assets and/or acquire new assets in accordance with the terms of this
Business Plan;
Aim to conduct itself in line with the values of the Council and be mindful of any impact
on the Council’s reputation;
To become known as a credible high-quality development, investment and management
brand;
When seeking debt financing, offer the Council the opportunity to match the best
available offer;
Deliver the objectives described above in the best interests of the Company, on sound
commercial principles and with a view to maximising overall return to the shareholder.
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2. Company Structure & Board
2.1. Hertsmere Developments Limited. is a private company limited by shares, with a single
shareholder (Hertsmere Borough Council).
2.2. It has been established under s1 of the Localism Act 2011 (which says that a local authority
may do anything that a person – i.e. a legal entity - may generally do); and s4(2) of the same
Act, which provides a caveat to that power, such that if a local authority wishes to do
something for a commercial purpose it must do so through a company.
2.3. The Company is governed by the Companies Act 2006. It was incorporated on 19 February
2016 with Model Articles of Association adopted (Amended Provisions).
Activities of the Company
2.4. As explained above, the Council established the Company in order to achieve four key
strategic objectives, which can be summarised as follows:
To generate revenue for the Council
To deliver mixed use development to provide much needed economic regeneration and
enhance business rate retention for the Council.
To deliver mixed tenure residential development; and
To better utilise surplus Council sites
2.5. The Board have reviewed these objectives and set their own Vision and Objectives, as
detailed at 1.13 and 1.14 above. In order to meet these aspirations, the Board has agreed
the following as the main activities which will be undertaken:
Development of affordable housing and sale to either Registered Providers or a Council
approved entity;
Residential development resulting in letting of properties to private individuals under a
private rental scheme (“PRS”);
Residential development resulting in sales to private buyers / third parties;
Development of non-housing sites for mixed use schemes such as retail and car-parking
which will most likely be let;
Investment into the property sector, including purchasing income generating assets;
and
Management and maintenance of retained operational units.
Company Structure
2.6. The structure of the Company has been designed to deliver the Vision and Objectives and
undertake the Activities detailed above. It has been designed with the following key drivers:
Ensuring an efficient and effective governance structure is put in place;
Delivering the most tax efficient approach possible;
Limiting liability and ensuring risks are appropriately managed and ring-fenced; and
Providing flexibility for future structural change.
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2.7. HDL is established as a 100% owned subsidiary of the Council. Hertsmere Homes Limited
(HHL) is an existing Company Limited by Shares that is a 100% owned subsidiary of the
Council that is currently dormant. HHL is to be moved to be a 100% owned subsidiary of
HDL.
2.8. The use of two companies, rather than one is for the following key reasons:
Focusing activity and ring fencing risk – HDL will undertake all development activity
whereas HHL will be the specialist owner and manager of the retained rental units that
are developed by HDL or are directly acquired. By separating these activities, it enables
these companies to focus on their specialist areas of development and management
and maintenance activities.
Tax efficiency – By structuring this way it enables efficient tax treatment of SDLT, VAT
and Group Corporation Tax positions. This is due to the land/properties being able to
be transferred to HDL, and on to HHL, with no SDLT liability due to the Group status of
the Council and these 2 companies. Also, almost all the VAT incurred on all costs
attributable to property sales and long leases to HHL will be recoverable and group
Corporation tax treatments should apply.
2.9. The diagram below sets out the structure of the Group.
2.10. HDL has commissioned a tax review of this structure from BDO, its tax advisors. The outputs
of this work have been considered in this Business Plan. This work concluded that this is the
most appropriate and tax efficient structure to deliver the desired activities.
2.11. There is the potential in the future for this structure to be adapted to include subsidiary
companies to undertake specific development / management activity or to enter into future
joint venture arrangements. This type of group structure is often used again to ring fence
risk associated with specific developments or activities. The reason such an approach is used
is to manage the risk of the performance of these activities, for example, if any discrete
venture were to fail, through this approach it would not cross contaminate any other ring-
fenced activities or serve to collapse the overall structure. This will also help to secure
discrete funding packages around each subsidiary. This approach would optimise flexibility
for the Company and the Shareholder and involve relatively modest set up costs.
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2.12. Key aspects of this structure will enable:
The ability to set up different companies to manage different risks;
The ability to set up joint ventures with private sector partners to meet the Company’s
aims
The ability of the Company, whether on its own or in a joint venture, to source external
funding on specific development sites;
The ability to hold specific asset classes and generate a return to the Company;
The ability to trade and provide services outside of the council; and
The ability to reclaim VAT on VATable services where these are provided
Governance Arrangements
2.13. HDL and HHL are both limited companies with their own Articles, a joint Business Plan and
Boards of Directors. 100% of the HDL shares are owned by Hertsmere Borough Council and
100% of the HHL shares are proposed to be owned by HDL. The diagram below lays out the
governance structure for HDL and how it interacts with the Council.
Council
HBC Executive
Shareholder
Representative
HDL
Board of Directors
Management Team
External Council Purchased
Staff
Consultants Support
HHL
Board of Directors
Management Team
HDL
Board of Directors
2.14. HDL’s Board of Directors shall consist of one Executive Director (Managing Director ‘MD’),
yet to be appointed, and seven Non-Executive Directors. All Directors, Executive and Non-
Executive, shall at all times be appointed by the Council.
2.15. The Directors are responsible for the management of the Company’s business, for which
purpose they may, with the exception of the matters requiring Shareholder consent and
expressly reserved pursuant to Article 6 (Shareholder Reserved Matters), exercise all the
powers of the Company.
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2.16. Directors of the company have a duty to act in the interests of the company, even if there is
a conflict with the interests of each other or the Council. However, in view of the rationale
behind HDL, and the structure agreed, it is unlikely that conflicts could arise. As the sole
shareholder of HDL, the Council are able to protect its interests by adding to, or changing
Directors, as it sees fit.
2.17. It is proposed that the Company Board meets at least bi-monthly for the first year ensuring
that the Board and Executive team work closely to ensure that the aims of the Company are
being met. Action will include, but not be limited to:
ensuring effective engagement with the [sole] shareholder and any other stakeholder(s)
as the Board deems appropriate;
progressing the property investment / development strategy;
subject to satisfactory financial appraisals, acquiring and delivering the property
investments / developments in a way that maximises value / return; and
identifying further opportunities.
Management Team
2.18. The Company’s management team report directly to the Board on all operational matters.
It’s make-up and the staffing structure beneath it is detailed in Section 3.3.
HHL
Board of Directors
2.19. HHL’s Board of Directors shall consist of one Executive Director (Managing Director), yet to
be appointed, and two Non-Executive Directors, of whom at least one will be a Board
member of HDL. All Directors, Executive and Non-Executive, shall at all times be appointed
by the Council.
2.20. The Directors are responsible for the management of the Company’s business, for which
purpose they may, with the exception of the matters requiring Shareholder consent and
expressly reserved pursuant to Article 6 (Shareholder Reserved Matters), exercise all the
powers of the Company.
2.21. Directors of the company have a duty to act in the interests of the company, even if there is
a conflict with the interests of each other or the Council. However, in view of the rationale
behind HHL, and the structure agreed, it is unlikely that conflicts could arise. As the sole
shareholder of HHL, HDL is able to protect its interests by adding to, or changing Directors,
as it sees fit with the consent of the Council.
2.22. It is proposed that the Company Board meets at least bi-monthly for the first year ensuring
that the Board and Executive team work closely to ensure that the aims of the Company are
being met.
The Council is to be provided with the minutes of these bi-monthly meetings and receive a
financial and operational reports on a monthly basis
Action will include, but not be limited to:
ensuring effective engagement with the [sole] shareholder and any other stakeholder(s)
as the Board deems appropriate;
progressing the property investment / development strategy;
11 | P a g eHertsmere Developments Limited Business Plan 2018
subject to satisfactory financial appraisals, acquiring and delivering the property
investments / developments in a way that maximises value / return; and
identifying further opportunities.
The Company will provide the Council with minutes of the bi-monthly meetings and a
monthly financial and operational report
Management Team
2.23. The Company’s management team report to the Managing Director of the Company, or prior
to that appointment the Company Representative, who reports directly to the Board on all
operational matters. It’s make up and the staffing structure beneath it is detailed in Section
3.13 to be agreed in detail at a future date.
Council
2.24. The Council wears three distinct hats in its engagement with HDL, these are as follows:
Shareholder – The Council is 100% shareholder of HDL. As such, its responsibilities are
to ensure that the company is well run and well managed. As shareholder it does not
have any rights to be involved directly in company management and does not
participate directly in corporate decision-making, subject to the terms of the
Governance Agreement which is included at Appendix E.
Lender – As the funding section elaborates below the Council is likely to be the main
source of senior debt for HDL. As such it has a separate role as lender that will be
undertaken separately from shareholder activities
Services Provision – The Council may deliver and receive services to and from the
Company.
Shareholder
2.25. A Shareholders’ Agreement has been entered in to by the Council and HDL which sets out
the governance arrangements, delegated functions and decision making structure. The
Council has nominated a shareholder representative that may attend Board meetings
Lender
2.26. Funding agreements will be developed and agreed on an ongoing basis between the
Shareholder and the Company.
Services Provision
2.27. HDL and the Council will enter into a series of service agreements for the scope of services to
be provided by the Council to the Company and from the Company to the Council.
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3. Company Staffing and Resources
3.1. There are three main areas of resource from which HDL will draw to deliver its scope of
services:
Internal resources;
Expertise from the Council, purchased by the Company; and
External Multi-Disciplinary Services covering services ranging from planning to
development management.
Internal Resourcing
3.2. HDL initially plans to operate as a relatively ‘light’ model with limited internal staff (MD), and
then procure most of its resources through the Council or other third parties. Predominantly
the activities of the company will be undertaken under the provision of a series of
Management Agreements with the Council. The Council will charge the company for their
time. Additional external support will then be procured as appropriate.
3.3. The supply of services to the Company from the Council will be at market rates, to comply
with state aid rules.
Illustrative HDL Resource Structure
Hertsmere
Borough Council
100% Shareholder
HDL
Managing Director
Services Purchased Services Purchased
from Council from Third Parties
Core Activities Core Activities
• Project Management • Investment Identification
• Monitoring activity • Investment Appraisal
• HR Services • Transaction execution
• Information Services • Agency advice
• Data Services • Financial Advice
• Back office services • Technical advice
• Accommodation • Development Management
• Programme Management
• Project Management
3.4. The proposed Company staffing structure set out in the diagram above, includes the MD
who will be head of service within the Company and will hold the Executive Director function
on the HDL Board and, as such, represents the Board at a corporate level.
3.5. With regard to the investment / development programme, the MD will have overall
responsibility for all aspects of the delivery of all component projects and for reporting back,
via the Board, to the shareholder.
3.6. All services will be procured either from the Council or from third parties, as appropriate.
3.7. The current planned resources for the company in the first year of the business plan and
assumed costs are set out in the detailed Business Plan at Section 6.
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3.8. The Property Portfolio Management role will be undertaken by the MD and will be
supported by a combination of third party resource and the Council’s Asset Management
Team. This role includes client management of specialist consultants and other service
providers to the Company. The role also includes monitoring and maintaining performance
on all investments and reporting on progress to the Board, as required.
3.9. Advising the MD in this role will be a series of other specialists from the Council and Third
Parties to support the activities in identifying, appraising and transacting investments and
undertaking all development activity. If required, this will be supported by workstreams with
external Multi-Disciplinary Teams who provide technical expertise across all necessary work
packages. This resource is commissioned by a range of multi-disciplinary practices on a fixed
fee or fixed percentage basis and will be agreed through the MD and reported to the Board,
as appropriate.
3.10. Other professional services, such as tax and legal advice, will be procured from the Council
or third party advisers or a combination of both, as appropriate.
Available Financial Resources
3.11. The intention is that the Company will be wholly financially self-sufficient, with all costs
relating to the operation of the business covered by the proceeds of its activities.
3.12. However, initial seed funding (‘working capital’) will be required from the Council. This fund
will be used to pay for all costs relating to the vehicle, up until the time that development /
investment revenue and proceeds are received by the Company.
HHL Resources
3.13 HHL Resources to be agreed with the Shareholder at a future date.
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4. Funding
Financing
4.1. The model developed assumes that the Council will provide the sole source of finance to the
Company by providing a combination of equity and debt. In addition, the Council will provide
a working capital loan facility.
Equity
4.2. The Company is wholly owned by the Council and therefore the only source of equity will be
the Council. This could change over time if there is a desire to bring other equity funding to
the project, but this would have an impact on tax arrangements. At the outset the Council’s
land value will constitute the equity funding. This is further expanded at 6.22 below.
4.3. The Council will realise equity returns from the Company in two ways:
Dividends paid out of profits, based on its ownership at levels which will reflect what a
private shareholder would expect from the Company
“Equity” investment made in the form of a loan at a coupon, or interest rate. The
interest return on this coupon would be realised to the revenue account.
4.4. It should be noted that equity funding is riskier than other forms of funding, if the Company
defaults, the equity providers will be the last to get their money back after paying back all
debt.
Debt
4.5. The Council will also provide debt financing to the Company. It will do this by borrowing at
the most competitive rates available. This could be from internal borrowing, the Public
Works Loan Board (PWLB) or/and the private sector e.g. pension funds. The cost of financing
to the Company from the Council will be at a market rate to avoid State Aid implications. It is
intended that debt funding will finance the majority of investments c.70 per cent of the total
development / investment value. All lending would be subject to a loan agreement, would
be secured against the land and would include pre-conditions on draw down, as well as on-
going performance measurement.
4.6. The Council would receive a return on its debt funding at the difference between its cost of
funds (borrowing rate); say 2-3% and the rate loaned to the vehicle; say 6-7%. In this case a
return of 3-5%. This is to compensate the Council for the funding risk of making these loans
and is in accordance with State Aid rules.
Working capital facility
4.7. The Company, as a ‘start up’ requires access to a short term revolving working capital facility
provided by the Council to fund any shortfalls. The working capital facility will incur interest
and may be paid down when the Company has available funds.
4.8. The Council will need to source this funding, therefore, separately to the core development
loans that are likely to be secured against the land. This will be a separate loan from the
Council to the Company.
4.9. HDL’s programme of works is reliant on its ability to secure finance and as such, will work
with the Council as its funder to ensure that access to finance is maintained throughout its
initial development programme
4.10. Should HDL look to secure funding from an external party, that is on different terms to that
offered by the Council, the Council will have the right to match the stated terms.
15 | P a g eHertsmere Developments Limited Business Plan 2018
5. Company Activities
5.1. There are a range of approaches that fall within the objectives of HDL, each with different
financial, risk and timing profiles
Risk/Return Characteristics
Lower risk & returns immediate revenue streams
- Investment in existing income low management input, but high level of control
producing assets / Property funds no competitive market advantage
Medium risk & returns delayed revenue streams
- Develop with risk sharing partner shared control, risk & profits
competitive market advantage on Council-
controlled sites
Higher risk & returns no short-term revenue streams
- Direct development full control and all profits, but all risk
competitive market advantage on Council-
controlled sites
5.2. These can further be characterised by a set of 6 core options as per the diagram below
Existing Assets Existing Assets Existing Assets Development – Development – Self
Risk Share Risk Share Development
Direct
Direct Direct
Investment Direct
Listed Property Forward Joint Venture
Investment
Investment Investment
Funds Investment Forward Forward Forward
Shares purchase /
purchase / purchase / purchase /
funding
funding funding funding
1 2 3 4 5 6
Increasing Risk & Return
5.3. The key characteristics have been plotted on the graph below
Potential
Reward
Option 6
Develop on own
Council retains full control,
economic benefit and risk liability
No short term•Forward
revenue
purchase / funding
Options 4 and 5 Retain flexibility as long term
•
Develop with a partner -5 investment •
Competitive advantage on own
Variety of risk sharing models •
sites s
Delayed revenue but forward
Options 1 to 3 funding
--3 model and early revenue
5
Invest in income producing assets delivery
• Shared control
Direct Investment
Immediate revenue delivery revenue
ofCompetitive
• Low level management advantage on own
Low level of management input .sites
•
required • No competitive market
Generally full control advantage
No competitive market advantage
Risk
16 | P a g eHertsmere Developments Limited Business Plan 2018
5.4. As defined at section 2.5 above the core activities of the Company will be as follows:
Development
Development of affordable housing and sale to either Registered Providers, a Council
approved or independent entity;
Residential development resulting in letting of properties to private individuals under a
private rental scheme (“PRS”);
Residential development resulting in sales to private buyers; and
Development of non-housing sites for mixed use schemes such as retail and car-parking
which will most likely be let.
Investment
Investment into the property sector, including purchasing income generating assets; and
Management and maintenance of retained operational units
5.5. The risk profile of each will be further examined in reviewing the two core elements of the
Activity – Investment and Development
Property Investment Approach
Context
5.6. HDL is seeking to take advantage of the current economic environment, where interest rates
are at historically low levels, to access finance from the Council under its Prudential Powers,
to acquire investment assets, generally focused around property, that have the potential for
high returns, when compared to other similar investments.
5.7. The Investment Property Databank (IPD) UK, All Property Annualised Total Return (which is
the income return added to the capital growth) for the 3, 5 and 10 years to December 2016
was 13.8%, 10.5% and 5.7% respectively4 demonstrating that even through the recession the
property sector as a whole has generated returns for investors.
5.8. However, as with all investments, there is no guarantee of future returns and the nature of
property investment returns is that they increase as the level of investment risk or
speculation increases. Following the EU referendum result, the current market volatility has
obviously added to these concerns and investment returns have eased. Therefore, the
Company’s strategy for investment is focussed on the longer-term nature of returns on
property investment, with potential for short term under performance.
4
source: IPD UK Annual Property Ind
17 | P a g eHertsmere Developments Limited Business Plan 2018
5.9. The graph below5 shows the potential returns that can be achieved outside of prime areas.
It shows that upper 6% to mid 7% is reasonable. HDL has the added advantage of being a
cash buyer in this market which should provide an effective discount and increase the yield
range below. Therefore, for this analysis a 7% yield is a reasonable assumption.
Strategic Objectives
5.10. The company has been established with a series of key objectives, as identified in Section 2
above. The key objectives that inform the Property Investment Strategy for HDL are
included below
Develop / Invest in a portfolio of assets that
- delivers an appropriate return to the Council, as shareholder, to be agreed on an
ongoing basis;
- balances risk and reward across the portfolio;
In developing / making investment decisions be cognisant of:
- the potential to reduce long term costs and risks to the Council as shareholder; and
- the Council’s economic development agenda;
To develop and utilise a series of approaches that are consistent with the Council’s
corporate strategy whilst maximising income return;
Commercial property development and other property investment can be undertaken
both inside and outside the Borough to contribute to the overall financial return
To undertake co-investment with public not for profit and private sector partners as
appropriate;
Dispose of existing assets and/or acquire new assets in accordance with the terms of this
Business Plan;
5
http://pdf.euro.savills.co.uk/uk/residential-property-focus-uk/residential-property-focus-q2-2012.pdf
18 | P a g eHertsmere Developments Limited Business Plan 2018
Aim to conduct itself in line with the values of the Council and be mindful of any impact
on the Council’s reputation;
To become known as a credible high-quality development, investment and management
brand;
When seeking debt financing, offer the Council the opportunity to match the best
available offer;
Deliver the objectives described above in the best interests of the Company, on sound
commercial principles and with a view to maximising overall return to the shareholder.
5.11. Crucially these objectives lay out a requirement to deliver financial returns and a headline
approach to establish a balanced portfolio that delivers these returns. These headline
objectives can be interpreted in a number of different ways, utilising a number of different
approaches. This section of the Business Plan seeks to articulate how they have been
interpreted by the Board and the portfolio approach that will be taken to investment for the
period covered by this business plan
5.12. This strategy aims for HDL to achieve financial returns through the creation of an investment
portfolio that will generate stable, long-term total returns that grow, as a minimum, in line
with inflation. The investment portfolio will consist primarily of real property assets with the
specific objective of achieving annual income on a long-term basis to support the financial
sustainability of the Council.
5.13. With the primary focus of HDL being on financial returns, it should also be clear that the fund
should not limit its investment to within HDL boundaries. It is recognised, however, that
there will be competing demands for the limited funds available to invest. Therefore,
investment business cases should also take some account of the wider socio-economic
impacts that may be delivered from in-Borough investments as well as the pure financial
returns. This should be considered in line with the recent Statutory Guidance on Local
Government Investments.6
5.14. HDL is seeking to undertake a spectrum of activities. As per 5.4 above, the Company’s
investment approach will be made through options 1-3. These are situated at the lower end
of the risk and reward spectrum, but should enable HDL to deliver a significant financial
return
Types of Investment
5.15. There is the potential for the Council to invest in a variety of different types of property
which can broadly be categorised as residential or commercial.
5.16. Appendix – C shows a matrix comparing the different types of investment considered, some
explanation and compares the characteristics of residential with commercial property
investment.
6
Statutory Guidance on Local Government Investments (3rd Edition) - Issued under section 15(1)(a) of the Local
Government Act 2003 and effective for financial years commencing on or after 1 April 2018
19 | P a g eHertsmere Developments Limited Business Plan 2018
Target Investment Portfolio
5.17. The Board has considered a variety of these asset classes, and the balance between them
and has defined the target balance of the portfolio across the life of this business plan in the
table. It is acknowledged that this balance will not be achieved from the outset but will be
targeted as investments are built up over the five year term of this Business Plan.
The table below sets out an indicative level of target return for each asset class and type of
investment that is within the scope of the company’s £5m investment strategy within the
first four years. It also shows the assumed build-up of the investments over time.
5.18. It should be noted that it has been assumed that HDL can invest outside of the boundaries of
the Borough. Some of the target yields shown in the table may be harder to achieve in the
Borough rather than outside, and instead of limiting the market the broadest approach has
been assumed.
Maint. &
Investment Purchase Net
% of Yield Gross Rent Manag.
Asset Class Allocation Fees & Investment
Portfolio (%) (£ / Year) (% of
(£) SDLT (£) (£)
Rent)
Residential Flats £1,000,000 20.0% £58,905 £941,095 7.00% £65,877 15%
Residential Houses £1,000,000 20.0% £58,905 £941,095 7.00% £65,877 15%
Retail & Service £2,000,000 40.0% £104,265 £1,895,735 7.00% £132,701 15%
Property Investment £1,000,000 20.0% £0 £1,000,000 7.50% £75,000 15%
5.19. It should be noted that in the baseline analysis for the business plan, the residential units are
operated over the long term and rental income provides the yield to the company. There is
an option to realise a level of capital appreciation in these assets by selling them
incrementally to realise their increase in value over time. This approach is common practice
within residential based investment portfolios. In the Financial Analysis section below
sensitivities and scenarios have also been shown where this capital appreciation is realised
to show the impact.
Property Development Approach
Context
5.20. HDL is seeking to take advantage of its unique position as a development vehicle that is a
100% owned subsidiary of the Council to:
Exploit its knowledge of the local regional market and stakeholders;
Access Council owned land that is surplus to its requirements;
Access equity and debt from the Council to undertake development;
Exploit the Council’s ability and willingness to take a longer term return than other
developers/ investors active in the markets; and
Utilise the Council’s existing skills and expertise in property.
5.21. From this position it is seeking to undertake development activity across the Borough on a
series of Council owned sites.
20 | P a g eHertsmere Developments Limited Business Plan 2018
Strategic Objectives
5.22. The company has been established with a series of key objectives, as identified in section 1
above. The key objectives that inform the Property Development Approach for HDL are
included below:
Develop / Invest in a portfolio of assets that
- delivers an appropriate return to the Council, as shareholder, to be agreed on an
ongoing basis;
- balances risk and reward across the portfolio;
In developing / making investment decisions be cognisant of:
- the potential to reduce long term costs and risks to the Council as shareholder; and
- the Council’s economic development agenda;
To develop and utilise a series of approaches that are consistent with the Council’s
corporate strategy whilst maximising income return;
Undertake housing development to facilitate meeting housing need in the Borough
whilst delivering policy level affordable housing, unless extraordinary conditions prevent
this
Housing development will only be undertaken within the Borough in the initial Business
Plan.
Commercial property development and other property investment can be undertaken
both inside and outside the Borough to contribute to the overall financial return
To undertake co-investment with public not for profit and private sector partners as
appropriate;
Dispose of existing assets and/or acquire new assets in accordance with the terms of this
Business Plan;
Aim to conduct itself in line with the values of the Council and be mindful of any impact
on the Council’s reputation;
To become known as a credible high-quality development, investment and management
brand;
When seeking debt financing, offer the Council the opportunity to match the best
available offer;
Deliver the objectives described above in the best interests of the Company, on sound
commercial principles and with a view to maximising overall return to the shareholder.
Activities
5.23. HDL will undertake development activities, in line with its objectives, on those sites
identified by the Company and which the Council will transfer at value as its source of equity
into the company (as detailed at 5.2 above) and other sites identified as part of the normal
business of the Company.
21 | P a g eHertsmere Developments Limited Business Plan 2018
5.24. The Company will undertake all aspects of developing sites, including:
Identifying opportunities;
Viability appraisal;
Design management;
Funding approaches / sources;
Third party / Contractor procurement;
Development management;
Sales and marketing strategies; and
Branding.
5.25. HHL will hold and manage properties where appropriate. Examples could include private
residential stock or commercial/industrial assets developed by HDL or purchased under the
Investment strategy.
5.26. The Company will undertake all aspects of managing these assets, including:
Letting strategy;
Responsive maintenance;
Lifecycle maintenance;
Rent collection;
Service charge collection;
Variety of management service delivery;
Third party / Contractor procurement; and
Branding.
5.27. The initial Business Plan includes eleven development sites currently owned by the Council
together with the acquisition of other development opportunities which have a gross
development value of in excess of £88m and the aim is to develop around 300 housing
units.
5.28. This forms the basis of the majority of the financial cost modelling and business projections
for the first 3-4 years of HDL.
5.29. However, whilst this represents a sizeable programme the Company will require a pipeline of
sites/development opportunities to succeed and grow into the medium/longer term. Unlike
most commercial undertakings, HDL’s focus will inevitably (at least initially) be on the
Borough of Hertsmere. Further and ongoing site identification will remain a significant
strategic priority. The process by which sites will be appraised and ultimately committed to
HDL is as follows:
5.30. The performance of HDL is reliant on the supply of sites from the Council and on timely
response times in order for the Company to act commercially. The detailed process to be
discussed with the Shareholder process. In addition acquiring other development sites.
5.31. The assumptions regarding site drawdown for this Business Plan are included in Appendix D
and are shown below.
22 | P a g eHertsmere Developments Limited Business Plan 2018
Proposed Development Programme
5.32. HDL’s initial development programme comprises short and medium sites is as follows:
Address
Land at Kimptons Close, Potters Bar
Land at Millbrook Road, Bushey
Birchwood Newcombe Road Shenley
Kimptons Mead, Potters Bar
Norfolk Gardens, Borehamwood
Meadow Road, Bushey
Caishowe Road, Borehamwood
Green Street Shenley
Orchard Close Radlett
Eldon Avenue Borehamwood, South of 77 to 83
Directors Arms, Borehamwood
TOTAL
A range of dwellings, between 2 and 20, will be built subject to site characteristics.
All developments will require statutory planning permission and all other necessary consents
Development Phasing
5.33. The key assumptions that underpin the business plan in terms of phasing have been
developed separately for the initial programme and Medium Term sites allowing for
particular site complexities, particularly when acquiring from third parties.
5.34. The tables below lay out the headline timescales. It should be noted that not all starts
commence at the same time, instead they are phased as shown in Appendix D.
Development Phasing
Start on Fees Enable / Demo Construction
Site Start Finish Start Finish
Start (mth)
Finish
(mth) (mth) (mth) (mth) (mth)
Initial Programme Sep 18 1 9 7 9 9 24
Medium Term Mar 19 1 13 10 13 13 37
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43
Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20 Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21 Jul-21 Aug-21 Sep-21 Oct-21
Short Term
Decision to Commence Project
Professional Advice (Fees) including consultation
and planning
Enabling works / demolition
Construction
Medium Term
Decision to Commence Project
Professional Advice (Fees) including
consultation
and planning
Enabling works / demolition
Construction
23 | P a g eHertsmere Developments Limited Business Plan 2018
Development Locations
5.35. The sites included in the initial programme are all within the Borough boundaries and are
well spread geographically including sites in all major settlements.
Future Pipeline – Development Activity
5.36. The Board is aware there are additional Council owned sites which may become available as
possible opportunities. Once the response to the Local Plan Call for Sites is in the public
domain the Board will review the outcome.
24 | P a g eHertsmere Developments Limited Business Plan 2018
6. Financial Analysis Redacted due to commercial sensitivity
25 | P a g eHertsmere Developments Limited Business Plan 2018
7. Sensitivity Analysis Redacted due to commercial sensitivity
26 | P a g eHertsmere Developments Limited Business Plan 2018
8. Risk Management
8.1. The Property Development and Investment strategy and operational programme detailed
above show a series of development and investments to be undertaken by HDL and ongoing
operational activity by HHL.
8.2. In undertaking these activities, the Company intends to take on a significant amount of debt.
The shareholder will be loaning to HDL to develop, invest and sell assets. HHL will manage
and operate assets. All of these activities carry with them significant risks that need to be
considered and mitigated, as far as possible. This section will set out the risk management
strategy, including a risk register that will look to manage risk at a company level
Risk Strategy
8.3. The Company has a risk management strategy that addresses corporate risk, through its
governance processes and project risk, through the project investment / delivery managers.
In order for risk management to be effective, risks must be:
Identified – The risk must be described, and possible consequences outlined
Assessed – Each risk must be ranked in terms of its estimated impact and immediacy
Controlled – Appropriate responses to risks must be identified, owners assigned, and
responses must be monitored over time.
8.4. The process to manage risks is set out in the flowchart below:
8.5. To facilitate the above strategy, a risk register is maintained and discussed in meetings with
the Board of Directors.
8.6. Company management will be responsible for risk management, risk reporting and ensuring
regular reporting to the Board.
27 | P a g eHertsmere Developments Limited Business Plan 2018
Risk Mitigation
Investment
Unbalanced portfolio – Risk is not defrayed by Robust development of property investment strategy with a
investing in a variety of types and risk level of diverse well balanced portfolio.
property type / use
Cash flow management – investment returns do Robust financial modelling and management of investment
not match outgoings resulting in unfunded portfolio with appropriate reporting arrangements and
elements of the business plan active management.
Property sector exposure – ensure a well Robust financial modelling and management of investment
balanced portfolio is developed including portfolio with appropriate reporting arrangements and
diversity in property type; geography; risk active management.
classification; life cycle of the asset; investment
structure; and management Board to agree criteria for investment and sale
Leverage – Ensure appropriate loan-to-value Appropriate ratio analysis should be used to review
(LTV) ratio / Loan to Cost (LTC) ratio is portfolio and manage it on a day to day basis. Appropriate
maintained. reporting mechanisms put in place to review these metrics
and take appropriate actions.
Development
Planning
There is a reputational risk of the Company not Pre-application planning advice with support from third
obtaining planning permission from the Council party advisers will be sought.
or planning permission not being obtained on a The decision to grant planning permission will sit with the
timely basis planning committee.
Ensure planning permission is granted in advance of
construction start.
Construction
Risk of unforeseen ground / site conditions which Ground investigation work will take place prior to tender
may delay demolition or construction. process
A site conditions report will be provided with ground report
in tender documentation
Construction price risk may cause construction Ensure there is appropriate contingency available in
costs to be higher than anticipated – impacting business plan to cover any overall price increases
the profitability and cash flow requirements of
the vehicle
Services/utilities are unavailable or lack capacity Utilities enquires will be undertaken to ensure availability
and capacity prior to development commencement
Specifics regarding legal title may adversely Council legal team or third party advisers will be requested
affect development costs and timescales to perform an early title review for all sites proposed in the
development
Risk in overpaying in the procurement process The Council will use expertise of in house procurement and
legal officers, outsourcing where necessary, to ensure
contracts are robust
Defective design and/or construction causes Appropriate warranties/performance bonds will be written
delays and additional costs into contracts completed prior to development
Construction costs are higher than estimated commencement
Post letting of contracts effective contract management
processes will be put in place
Insolvency of contractor Financial checks performed as part of procurement process
and guarantees taken out where required
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