Babergh and Mid Suffolk District Councils have established a joint company (CIFCO Capital) that borrows money from the Councils (currently up to £100m) which it then invests through the purchase of commercial properties.
As a result of austerity driven reductions in Government grants to local government, Babergh and Mid Suffolk have decided that it is necessary to generate alternative sources of income rather than make reductions to council services. The purpose of CIFCO is to create an additional net revenue income stream that can be used to pay for council services.
The CIFCO Board is comprised of two councillor directors, an officer director and three non-executive directors, recruited for their relevant sector expertise.
In making investment decisions the CIFCO board is also advised by professional property agents, lawyers, fund managers and managing agents. To date CIFCO has invested circa £60m through the purchase of 14 properties. In deciding to purchase these properties the board has considered, applied due diligence, and dismissed over 140 other potential property purchases.
All such decisions must be in accordance with the CIFCO business plan, which is reviewed and approved by each council on an annual basis. In particular, the business plan includes a detailed approach to risk. CIFCO invests to create a diverse portfolio, ensuring no single market, sector or tenant contains a disproportionate level of the overall funds invested and therefore mitigating any risk of tenant or market failure. For example, this approach has successfully ensured that over the past 12 months CIFCO has been reducing retail risk and exposure.
CIFCO focuses on properties with secure, longer term, leases to strong covenants, in order to lower the likelihood of tenant failure and fluctuations in income; and continuously monitors the performance of the fund.
The councils themselves are borrowing the money (currently up to £100m) that is then loaned on to CIFCO. The councils borrow this money either on a short-term basis or from the Public Works Loan Board (‘PWLB’) either when purchases are made or at a point afterwards, depending upon the councils' cashflow position.
Where the councils then loan the money to CIFCO this must be at commercial rates. These loans are secured by the properties that are purchased. If CIFCO were to default on the loans, the property ownership would revert to the Councils. The Councils would then service their PWLB loans from the income received directly from the properties. The loans that the councils have taken out from PWLB are at a significantly lower rate than the interest rate that CIFCO pay to the councils and as such it is unlikely that the property income would not cover the costs of these loans.
Over the past two years the CIFCO arrangement has been successfully established. This has generated net income to the councils of £3.34m which will grow to £11.9m over the next 4 years.
The councils originally decided to establish this fund for £50m. £50m was determined to be the minimum level required to establish a cost-effective company structure and balanced portfolio. Now that these arrangements have matured, the councils have agreed to increase the total fund to £100m. This is anticipated to increase the income generated to the Councils by £8.9m over the next 4 years and is still considered to be a proportionate level of investment as compared to the overall size and financial budgets of the councils.
In addition to these income generating investments both councils are simultaneously continuing their own regeneration-based investments within each district which includes, for example, leisure centre improvements, retail & leisure developments, industrial estate development and house building. This is a financial commitment and investment for Babergh of £86m over the next 4 years and of £81m for Mid Suffolk over the same period.
The Board has been closely monitoring CIFCO performance over recent months. CIFCO made its full repayment to the councils in March 2020, having collected over 70% of the March quarter's rent, bringing the total net return to the councils for 2019/20 to £1.634m, up from £1.4m last year<./p>
We are expecting the June 2020 quarter to be more challenging, however still expect rents received to exceed any borrowing costs that need to be covered by the councils.
The CIFCO portfolio is balanced between tenants, sectors, and locations in order to mitigate risk and this is helping CIFCO to weather the current storm. In the event of any tenants struggling to pay rent, the Board and its advisers work with them to agree payments over a longer term to mitigate income loss in the short term and ensure the strength of the portfolio over the longer term.
Covid-19 is affecting everyone's finances and CIFCO is not immune, but the Board is confident that the portfolio will continue to deliver important income for the councils in the future.