The Strategic Services Director introduced the above mandate which was before the Executive Advisory Board (EAB) as an update primarily for information as no decision in this respect was required at present. The need for a renewed strategy regarding industrial estates had been identified and when the mandate had been considered by the Executive the previous week, Lead Councillors had agreed that the mandate should be shared with the EAB at this meeting to enable it to provide any related comments or feedback.
The Asset and Property Manager (Investment) presented the mandate proposal which sought the Executive’s agreement to fund the development of a strategy and subsequent redevelopment of the Council’s industrial estates, offering four different options in this regard. The Commercial Property Investment Programme (CPIP), which formed part of the Council’s Savings Strategy, sought to increase rental received and capital values of assets held to generate additional income of £830,000 per annum over the base budget to contribute towards tackling the Council’s budget deficit.
Changes to the Public Works Land Board (PWLB) funding criteria made in November 2020, together with alterations to the Minimum Energy Efficiency Standards (MEES), had resulted in the Council widening its remit of property redevelopment and strategic acquisitions funding to enable it to invest further in its existing investment portfolio. The impact of COVID-19 had presented difficulties for the Assets Team to source the appropriate quality of investment stock in the Borough at the correct price and therefore an alternative approach was required to protect and increase the Council’s rental income.
Following the success of the redevelopment of Midleton Industrial Estate, the Council wished to develop an overall growth strategy and vision for the three remaining industrial estates, namely, Slyfield, Lysons and Woodbridge Meadows. This would involve providing a strategy for each individual estate to identify where increased rental income and capital value could be created, and to acquire significant investment, redevelopment and potentially dispose of surplus assets where appropriate. Each project would require a business case, funding would seek to meet the Council’s corporate priorities such as increasing employment, attracting inward investment and improving energy efficiency.
A number of the Council’s industrial estates were not achieving energy efficiency owing to obsolescence and approaching end of economic life leading to a potential loss of income in the case of some assets from March 2023, from when the MEES Regulations would impose stricter standards of energy efficiency in respect of non-domestic rented properties.
Carrying out a detailed review and assessment of the remaining estates and assets would enable the Council to identify opportunities and steps required to protect and grow its rental income and assist with meeting its strategic objectives. This would develop into an overarching strategy to realise the future growth of the Council’s industrial portfolio.
The Strategy would be developed in two phases, firstly, to prepare a high level report outlining the status of the Council’s industrial estates and identifying all issues, risks and opportunities, and secondly, to provide overarching vision, future growth strategy, level of investment required and the likely duration of projects. Phase 2 would also identify strategies for each estate to inform full business cases for approval and funding to ensure that the industrial portfolio was fit for purpose and to inform how to plan for future property investment.
It was vital for work to commence at the earliest opportunity to enable the Council to protect the continued receipt of rental income from those units which were at risk of becoming unable to sustain occupation from March 2023 owing to the implementation of the stricter energy efficiency measures. At this point, when properties with energy efficiency ratings of ‘F’ or ‘G’ could not be occupied, rental income loss could be in the region of £63,000 per annum increasing potentially to £353,000 each year from March 2025 when ‘E’ rated properties would no longer be compliant. MEES Regulations were continuing to implement increasingly stricter standards up to 2030 when it was intended that all occupied property met a minimum rating of ‘B’.
The relevant Lead Councillor advised that the proposed strategy reflected the Council’s wish to revitalise its industrial units to assist local businesses whilst representing minimum risk in terms of income as this was spread across several industrial estates. Following the redevelopment of Midleton Industrial Estate, there was strong demand for units at the site resulting in the provision of high rental yield.
The following points arose from related questions, comments and discussion:
(a) Favour was expressed for mandate Option 3 ‘Do more’ moving towards Option 4 ‘Do Most’ in reflection of imminent changes relating to the industrial economy.
(b) It was emphasised that the key priority for the Council was to take the necessary steps to protect its existing income base, particularly to pursue rapid action to identify resolutions in the case of units which would potentially be unoccupiable from March 2023 and thereafter owing to the MEES Regulations. The following priority would be to identify opportunities for investment in the Council’s existing portfolio owing to the change in the PWLB lending criteria which did not support investing in and buying an industrial property purely for rental yield.
(c) Although some sectors of the property market, for example town centre businesses, were experiencing reduced demand for property leading to rental values depreciating, the industrial market was buoyant and had been strengthening over the past three to four years seeing rental values growing from £9-10 per square foot to £16 or more in the case of redeveloped prime units. Although it was anticipated that growth in the industrial area would continue going forward, this was likely to be at a reduced pace compared to recent years.
(d) The Council was currently generating approximately £3,750,000 per annum from its four industrial estates and therefore the predicted income losses owing to the MEES Regulations impacted upon a relatively small proportion of the units during the next two years. However, more units would be affected and this loss would increase as 2030 approached as a result of stricter carbon emission standards, reflecting the need for a robust strategy to minimise any future loss of income.
(e) Although Slyfield Industrial Estate was adjacent to the proposed Weyside Urban Village redevelopment site and a service road serving both sites had been provided, they were separate and unconnected projects.
(f) In terms of desired employee skills, this would be a reflection of the market and the requirements of local businesses seeking to lease an industrial unit from the Council. The local colleges and university were constantly engaging with local companies to ascertain skill requirements and adapting their educational programmes accordingly, where possible. The proposed new Economic Development Strategy would include a chapter dedicated to skills and employability. There was a wide economic base in Guildford offering employment across a wide spectrum from low to highly skilled positions.
(g) With regard to obsolescence, a number of the assets within the Council’s industrial portfolio had been constructed in the 1970’s and 1980’s and had a finite lifespan. The MEES Regulations were driving landlords to update their property to meet the associated energy efficiency standards. The Council’s Climate Change Strategy also required proactive action in this area to ‘future proof’ the portfolio and its income generation capacity.
(h) Although the industrial property market was currently strong, it was expected that in the event that the market weakened, prospective leaseholders would favour the best quality modern units which enforced the Council’s ambition to refurbish or redevelop its units to attract new tenants and maintain rental income in a competitive environment.
(i) It was unlikely that the Council would be able to access any grant funding towards redevelopment of its industrial estates as they comprised commercial investments which returned a profit to the Council and did not constitute regeneration of a failing operation that could attract Government funding.
(j) Although there were instances in other boroughs of unused commercial premises being converted to housing where planning permission allowed, that approach was not favoured in Guildford as it would lead to the need for reprovision of employment land on other sites to meet known demand which could present land availability and income generating challenges. Also, the current value of industrial land in terms of growth was outpacing that of residential sites and the positioning of housing in the vicinity of industrial developments was considered inappropriate.
(k) It was hoped that a similar strategy could be applied to the Council’s social housing assets stock, particularly where empty properties were concerned. The awaited outcome of the Council’s Housing Task Group would inform this area.
(l) The developers of the Riverside Business Park had indicated an intended shift away from primarily student housing accommodation to reprovision of the same amount of existing employment space together with a family homes scheme. The need for the developers, who had been in receipt of pre-application planning advice from the Council, to resolve the related potential flooding issue in liaison with the Environment Agency remained.