Midleton Industrial Estate Redevelopment - Guildford Borough Council
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Executive Report Ward(s) affected: Onslow Report of Director of Community Services Author: Gaurav Choksi Tel: 01483 444515 Email: gaurav.choksi@guildford.gov.uk Lead Councillor responsible: Nigel Manning Tel: 01252 665999 Email: nigel.manning@guildford.gov.uk Date: 17 July 2018 Midleton Industrial Estate Redevelopment Executive Summary Midleton Industrial Estate, which is in the Council’s freehold ownership, has significant potential for redevelopment over the medium term. The Council has decided to develop the site in phases as and when leases expire or are determined. The Executive approved a business case for the redevelopment of the Midleton Industrial Estate on 24 January 2017, as part of the 2017-18 capital programme report. This report outlines progress with the delivery of the project, including the current spend and the works completed to date as well as the remaining scope of works to be delivered during 2018-19 and 2019-20. The Executive is asked to approve the transfer of £3.65 million from the provisional capital programme to the approved capital programme in order to complete phase one of the redevelopment. Recommendation to Executive (1) That the sum of £3.65 million be transferred from the provisional capital programme to the approved capital programme to enable the continuation and completion of the design and construction of phase one of the Midleton Industrial Estate redevelopment, as detailed in this report. (2) That the Director of Community Services, in consultation with Lead Councillor for Finance and Asset Management, be authorised to progress the design and construction of phase one. Reason for Recommendation: To progress the redevelopment of Midleton Industrial Estate site in phases to enhance both the capital value and rental income of the Council’s property assets.
1. Purpose of Report 1.1 The purpose of this report is provide the Executive with an update of the Midleton Industrial Estate redevelopment programme carried out so far in delivering phase one of the project, and to seek approval for transfer of the necessary funds to continue to progress and deliver the project. 2. Strategic Priorities 2.1 The recommendations support the delivery of the following priorities from the Corporate Plan 2015-2020: Our Economy The project will enable the Council to meet the following priorities: Providing economic leadership to deliver sustainable and proportionate growth Maintaining and growing our business base Providing for high quality commercial land and buildings Improving skills and employment opportunities Unlocking the economic advantages of urban regeneration Our Borough The project will enable the Council to meet the following fundamental themes: Economic leadership to deliver sustainable and proportionate growth Maintaining and growing our business base High quality commercial land and buildings Improving skills and employment opportunities Unlocking economic advantages of urban regeneration It will also contribute to the following priorities: Ensuring an attractive, competitive, multi-faceted and vibrant town Sensitively integrating development into existing communities Our Environment The project will enable the Council to meet the following priorities: Reduce energy and water use Clean and attractive borough Protecting and improving our environment Your Council The project will enable the Council to meet the following priorities: Ensuring long-term financial stability and sound financial governance Improving value for money and efficiency in service delivery Increasing income from commercial services Maximising the value derived from our property portfolio Improving access to our services and enhance the experience of customers
3. Background 3.1 In accordance with the Council’s Asset Management Framework, the Council continues proactively to look at opportunities to enhance both the capital value and rental income of the Council’s property assets. 3.2 Midleton Industrial Estate lies adjacent to Guildford Business Park and, over the medium term, has significant potential for redevelopment. 3.3 The entire Midleton Industrial Estate comprises around 5.7 acres. The Estate is divided in accordance with the long leaseholds previously granted. 3.4 The units are typically 1970s warehouses of steel portal frame construction, most of which have roofs containing asbestos. Most of the Buildings are approaching the end of their economic life. 3.5 There has been a strategy in recent years to buy back units, which were let on long leaseholds to enable redevelopment for continued industrial use. The plan is to demolish the older style units to create suitable development plots when the majority of current leases expire, from 2020 onwards. 3.6 The Council has now decided to bring forward the scheme and develop the site in phases as and when leases expire or are determined. 4. Current demand/supply for industrial space 4.1 Current occupier demand is focused predominantly on small space requirements i.e. up to around 5,000 sq. ft. (465 sq.m). Generally speaking, the smaller the size, the higher the demand. It follows therefore that the highest demand is for units up to, say, 2,000 sq. ft. (185 sq.m.) with the next most popular size category being 2,000 – 3,000 sq. ft (185 - 280 sq.m). 4.2 Land for industrial development is in short supply in the Borough. This, coupled with the lack of new development in recent years, means that existing industrial buildings are also in short supply. There is a low vacancy rate with stock shortages apparent across all the size ranges. 4.3 The shortage in supply, particularly of small units, can be further demonstrated by the lack of availability in respect of the Council owned Enterprise Units. The three schemes (Foundation Units and Enterprise Units at Slyfield and Enterprise Units at Ash Vale) are virtually at 100% occupancy. These schemes comprise a total of 58 units, but current availability is virtually nil. 4.4 The Council’s advisers Lambert Smith Hampton (LSH) have said there is more than sufficient demand to support a small unit scheme on site to provide a broad range of unit sizes from say 1,000 – 5,000 sq. ft. (93-465 sq.m.). 4.5 LSH have advised that depending on what development plots come forward, the Council give consideration to medium range units circa 5,000 – 10,000 sq. ft. (465-929 sq.m.) again, constructed in a terrace or terraces and a plot suitable for building of up to 25,000 sq. ft. (2,323 sq.m.) as a single unit, or possibly
developed with flexibility in mind that it can be divided into two units of 12,500 sq. ft. (1,161 sq.m.). 5. Current position 5.1 A design team has been appointed and a masterplan prepared for the redevelopment programme. The rate at which the estate can be developed will depend to some degree on the current lease arrangements. 5.2 Units 3, 4, 5 and 11 are, or can be, available through discussions with the current leaseholders and have therefore been placed in the first phase of the redevelopment programme. Regard has also been had to: Condition of the existing buildings The need to optimise the estate layout 5.3 Various surveys, ranging from ground to ecological surveys, have been completed to support the project moving onto the stage at which a planning application can be submitted. 5.4 The current proposal for phase one is to deliver the development in two stages; which will enable the improved layout identified in the masterplan to be achieved. Stage 1: Unit 11 Stage 2: Units 3, 4 and 5 5.5 The intention is to commence the procurement exercise for the construction partner in parallel with the planning application to enable the redevelopment to start at the earliest opportunity. 5.6 There are on-going discussions with affected tenants with a view to minimising disruption. The nature of the project means, for some, that this is unavoidable. 6. Financial implications 6.1 There is £200,000 in the approved capital programme and £14.86 million in the provisional capital programme. Officers request the transfer of £3.65 million from the provisional capital programme to the approved capital programme, to enable the delivery of phase one of the project. 6.2 The anticipated cost allocation is set out below: Construction costs £2,880,000 Planning and associated statutory fees £300,000 Project risk contingency £470,000 Total £3,650,000 6.3 The project risk contingency will not form part of the construction contract and will only be used if circumstances warrant.
6.4 The investment will improve the estate generally and will not only make it more lettable but also generate a long-term and more sustainable income stream. 6.5 Officers have carried out a high-level financial appraisal of the proposed development based on both the projected costs and income streams reflecting current market conditions. The appraisal indicates an initial yield of 6.3% and an IRR of 6.8%. These returns are in-line with the remainder of our portfolio and the local market for such properties. The development will also increase the capital value of our overall commercial property portfolio. 7. Equality and Diversity Implications 7.1 No specific equality and diversity implications have been identified. 8. Consultations 8.1 Officers have discussed the scheme with existing tenants of phase one. There will be formal consultation as part of the planning process. 8.2 Ward councillors and the lead Councillor support the redevelopment programme. 9. Risk management implications 9.1 The project attracts a range of risks, which include: Planning risk The scheme will require planning permission. Officers will engage with planners as part of the pre-application process. Construction cost The project quantity surveyors have allowed a suitable contingency in the cost allocation. Market risk The volatile nature of the market makes it difficult to predict accurately the level and response to an individual procurement exercise. Possession Whilst we have possession of the majority of the phase one properties, we cannot be certain at this stage that all the properties will be available to allow the first phase to be delivered in one stage. The alternative will be to construct the project in two stages, with the second stage starting in 2020. Letting of properties This is considered to be a low risk having regard to current demand patterns. We will look to pre-let the units so far as possible.
10. Legal Implications 10.1 Legislative changes contained in the Energy Act 2011 make it unlawful to let commercial properties with an EPC Rating of F or G (i.e. the lowest ratings) from April 2018. The units at Midleton range from D to F. Two units fall outside the lawful categories and will require improvements to bring them up to the standard should the development not proceed. 11. Human resource Implications 11.1 The project will be managed within our existing resources with the support of external consultants, which has been allowed for in the budget. 12. Summary of Options 12.1 The only other option is to do nothing in which case the existing units continue to deteriorate costing the Council further money to comply with lease terms. The units are reaching the end of their economic life and will require significant investment if the Council wishes to re-let the vacant properties. The units are not that attractive and should the Council wish to re-let them, the level of rent to be expected will be lower than new units. 13. Conclusion 13.1 Redevelopment of the Midleton Industrial Estate will create a more secure asset and investment for the Council by providing much needed industrial stock. It will encourage new businesses into the area and allow existing businesses the room to grow. It is therefore officers’ recommendation to transfer the budget required from the provisional capital programme to the approved capital programme to enable continued delivery of the project. 14. Background papers None 15. Appendices Appendix 1: Layout Plan Appendix 2: Bid for Funding: Redevelopment of Midleton Industrial Estate
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