Aren’t we forgetting something?

brunswick-house-external-entranceThe County Council has just reported the acquisition of a student accomodation block, Brunswick House, in Cambridge. It confesses to spending £38 million and say that it will ‘allow (it) … to plough £1.9m a year back into vital frontline services’.

Sounds good and the deal has been reported as a ‘record’ deal with a yield of 4.76% (click here for the source of that information). 4.76% of £38 million is close enough to £1.9 million so we can take that for the basis of the Council’s press release.

Trouble is the Council borrows money to fund such purchases. It can do so cheaply from the Public Works Loan Board (PWLB) because it’s a local government entity. The rates for new loans run from 1.7 to 2.3% depending on the period of the loan. Paying for the loan reduces the yield to somewhere between 2.5 and 3%. Still good but not so good.

The other consideration is occupancy. The declared yield is at 100% occupancy. There are 251 beds in total so if some are not let, not likely this year but what about future years, then the margin gets reduced. And it’s likely to be doubly so if rentals soften to keep occupancy up. With such a small yield it’s easy enough to imagine a scenario in which they go negative because debt service is such a high fixed cost.

Investing in commercial property is something for the experts who understand and can mitigate the risks involved. I’m not sure it’s right for a local council. Click here for an earlier post on the subject.

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