Due diligence costs for major property acquisitions - Surrey Heath Borough Council

Date: 

Friday, 13 December, 2019

Surrey Heath Borough Council has put in place a property investment strategy to enable regeneration, promote economic development and generate income to maintain council services after the loss of all Government grant funding for the borough.  Purchased properties can generate a vital revenue stream to support the Council’s services.   

 

Properties purchased by the Council must demonstrate long-term capacity and sustainability to generate income. Some properties are purchased to enable further regeneration of the building or area.  

 

The price asked has to be accurate and fair in respect to the current market.  

 

Councillor Richard Brooks, Leader, Surrey Heath Borough Council said; “Before the Council makes a significant property purchase, advice is sought from a number of independent experts to ensure the property represents a sound long-term investment and represents best value. The due diligence process assesses the possible risks associated with the purchase and the impact this may have on value. 

 

The Council’s external due diligence costs have averaged less than 0.5% of the purchase price of the asset.  The Council’s current property portfolio include The Square shopping centre in Camberley town centre, Theta offices on Frimley Road, Albany Park Industrial Estate and Vulcan Way Industrial Estate.  The council agreed to purchase The Atrium shopping centre in the summer of 2019 subject to due diligence being satisfactory.  However, the purchase was not completed as the potential risks found were considered to be too high in relation to the price being requested.  The asking price quoted by agents for The Atrium at that time was £29.4million and the due diligence costs for that property were £120k, which equates to 0.4% of the purchase price. 

 

This due diligence process generally consists of legal work to check on title and tenancy agreements, structural surveys to highlight issues, financial checks on tenants, payment of rent etc. as any of these could have a bearing on the inherent risks in the purchase and therefore the price that is being paid.   

 

Under accounting rules due diligence costs can be added to the capital value of an asset as part of the acquisition cost. However, if the asset is not purchased then the cost must be charged to revenue.

  

Generally, the level of due diligence undertaken will be relative to the value of the property. The evidence from the due diligence process may be used to renegotiate the price or to obtain guarantees from the vendor. In some cases, the outcome of the due diligence may indicate that the purchase should not proceed or the vendor may not agree to adjust their price to reflect the findings. When this happens the due diligence costs become abortive and have to be written off.   

 

Councillor Richard Brooks concluded; “As part of its wider strategy, the Council will continue to consider potential investments which may support its income generation and regeneration objectives. The relevant robust due diligence process will be carried out in these circumstances to assist in making informed decisions on any potential investments.” 

 

Camberley Be Inspired 

 

Surrey Heath Borough Council (SHBC) is committed to supporting and regenerating Camberley.  SHBC’s investments have already seen the acquisition of The Square shopping centre, commencing its refurbishment programme within the first year of ownership.  Followed by an ambitious set of projects to improve the roads, pavements and street scene.  A redundant office building has also been purchased to create 116 high quality town centre apartments, with proposals to re-deliver new commercial space.    

 

Kier Property have been selected by SHBC as development partner for the London Road site.  Situated fronting the London Road, opposite the Royal Military Academy Sandhurst, the 5.5-acre site has the potential to create a mixed-use development and improve the gateway to Camberley.   

 

SHBC has signed a 25-year contract with Places Leisure to design, build and operate a new £22 million leisure centre. The new centre will feature new swimming pools, sport courts, fitness facilities and a café.  The new centre is now in construction and is due to open in 2021. 

 

The regeneration work is supported by a comprehensive events programme, grant schemes for independent businesses and cultural and enrichment projects to ensure Camberley is a key destination and experience.  In Camberley we are committed to reshaping and enhancing the town centre to support our community and local businesses while high street retail faces challenges nationally.    www.camberleybeinspired.com