By Brian Pain
As hoped, the reaction to our investigation into Faversham Town Council’s controversial purchase of a former Shoe Shop was extremely positive. Many readers thanked us for revealing the true costs to the town.
It also prompted Nigel Kay – one of the councillors behind the scheme – to issue a lengthy statement, reproduced in full opposite.
After carefully considering it, we’re still of the opinion that the project is fundamentally flawed. It exposes the town to a risky investment with an unreasonable long-term financial burden.
Fifty-year extrapolated valuations are always unreliable and investment in retail property especially so. The number of empty shopfronts or charity shops in Faversham alone make us sceptical of the wisdom of the enterprise.
After we published our report, councillors’ private comments suggested there was less than full understanding of the financial arguments when they voted in secret to approve the deal.
Faversham is suffering from cuts to expenditure in so many areas that the commitment of such a large proportion of its annual income to what may turn out to be nothing more than a vanity scheme, means that even if – and it is a very big if – the town ends up an asset worth millions in fifty years’ time, many causes desperately needing funding now will go without.
Mr Kay doesn't seem to grasp something well understood in banking circles: the concept of opportunity cost. In other words, the benefits an investor misses out on when choosing one alternative over another.
We therefore issue the following challenge:
If Mr Kay is prepared to submit his costings, financial assumptions and projections to independent scrutiny by a suitably qualified financial professional and has them vindicated as appropriately cautious and suitable borrowing for a Parish Council to undertake, then the Faversham Eye will apologise and donate £5,000 to a local town charity.
If the conclusion is otherwise, Councillor Kay will apologise publicly to the town and resign from Faversham Town Council.
Nigel Kay's letter:
Published 16th January on the Faversham Town Council’s website
I am pleased to respond to the points raised in the Faversham Eye. I understand that the person who wrote the piece is Mr Richard Fleury and it was published by Mr Brian Pain, the previous leasehold of Standard Quay. I am not sure why their names do not appear anywhere on the publication.
I am going to concentrate on the financial aspects of the article, but we should remember the background to the 12 Market Place Project.
The Town Council needed extra space to fulfil the aspirations that were set out in Faversham 2020.The Magna Carta 800 had shown the most incredible interest in Faversham’s Magna Carta and other Medieval Charters and there was a desire to have a legacy for the Town of having them on permanent display.There had been a re-assessment of the historical importance of Faversham's Magna Carta and it had become priceless which caused security issues and even more pressure on the Town Council to ensure they were stored securely in the right climatic conditions.The need to preserve the collection was paramount, and the safe used to store them for many years was regarded by the Fire Officer as totally unsatisfactory, hence them being currently stored in Maidstone. I believe that the people of Faversham do not want this; they want their Magna Carta and Charters, stored safely on permanent display in Faversham.
Then an opportunity arose:
12 Market Place did not seem to be attracting a permanent retail tenant and the people interested in acquiring the building wanted it for uses that the people in the Town were not keen on.The area was 60% more than the Town Council has which gave the opportunity of having a permanent display of the Magna Carta.12 Market Place was opposite the Guildhall which helped achieve one of the Town Council’s objectives of increasing access to the Guildhall12 Market Place had most of its first floor bricked up with a small access hatch as the owner did not think that it would be of interest to anyone.The owner only wanted to rent out 12 Market Place and retain the freehold but he agreed to consider selling the freehold to the Council.Interest rates were at record low levels and the Town Council was able to borrow the money to purchase the freehold at a rate of 3.1% fixed for 50 years.To get grants the Town Council needed to obtain the freehold.
There are numerous references in the Faversham Eye to obtaining a lot of information using Freedom of Information notices suggesting that matters were being hidden. In fact all the information needed was already in the public domain and there was no secret about any of it.
In the Faversham Eye I see figures scattered about that I recognise, but I do not believe that in many cases they have been used in context. The paper contains a fundamental flaw as it does not correctly deal with the issue of inflation. I believe that the information quoted is distorted and in the case of the financial appraisal and the conclusions drawn they are just plain wrong. It is difficult to fathom how anyone with experience of finance could have misunderstood the figures so fundamentally.
Most financial decisions stretching for any period over 4 years, or so, need to consider the effect of inflation. In the case of 12 Market Place the proposal involved a purchase of over 50 years so proper consideration of inflation was vital. As anyone involved in the banking or financial services sectors will know, inflation is often the deciding factor that changes an apparently profitable proposal into an unprofitable one, or an apparently unattractive one, into an attractive one. In the case of 12 Market Place the effect that adjusting for inflation has on the calculations is amazing.
We should not be surprised by the effect that inflation has on things as most of us have experienced the in our own lives. The Faversham Eye made me think about my own experience, and while I am not old enough to have acquired my first house 50 years ago, 36 years ago I purchased my first house for £21,000 in the Knole. I looked it up at the weekend and it is currently being advertised for £270,000 which is 13 times what I paid for it. While house prices often go up more than inflation, the Retail Price Index figures also shows what dramatic effect inflation has. The RPI figures are not available for the end of 2018, but they are available up to the end of 2017. They show that prices from 1967 to 2017 have increased to 17 times what they were in 1967.
There is also a relevant index available which shows that commercial property has increased in value since 1986 by an average of over 10% per annum.
Of course it is said that past performance is not necessarily a guide to the future, but often it does seem to be.
We have looked at the renting V buying figures using a discounted cash flow analysis. This is a standard approach and should again be readily understood by people who work in Banking or Financial Services. I first come across these techniques when I was studying for my Banking exams over 40 years ago and they are very well established.
In doing this analysis a very prudent line has been taken. The good thing that Gordon Brown did when he was Chancellor of the Exchequer was to make the Bank of England independent from the Government, and give them a target for inflation of 2.5% per annum. This is the rate we have used for our calculations. The results of assuming 2.5% inflation over 50 years are:
The cost of the instalments in real terms is less than half of what is in historical costIf the Council had continued renting as before, the total amount of rentpaid over the next 50 years, if the rent increased in line with inflation would be over £700,000.In 50 years time the value of 12 Market Place, if it increases in line with inflation, I expect will be over £3.5 million. In practice I would expect its value to be far higher than this.In 8/10 years time there will be a reversal of the position. The cost of the annual repayments should be less than the annual increase in the capital value of the asset.The analysis is not adjusted for the fact that the Council has 60% extra space, as even without taking that into account, the purchase still makes sense
In fact at the time of the purchase the Chief Financial Officer of Swale B.C. who is a Member of the Chartered Institute of Public Finance and Accountancy, looked over the figures and agreed with them. In fact I spoke to him again recently, and his view remains that the case for the purchase of 12 Market Place was, and remains, overwhelming. So you have two qualified accountants who believe that buying 12 Market Place, was overwhelming the correct decision.
I could go on further about the other aspects of the Faversham Eye article as there are similar problems with their comments on the Faversham Jetty, grants, tourism and the Creek Bridge. They are negative about everything.
I remain convinced that the decision to buy 12 Market Place was not only the best thing for the future of the Town but, if the Council had not done so, they would have been right severely criticised for letting the Town loose a golden opportunity that might never re-occur. It must not be forgotten that is 50 years time the Council will have a freehold building, in the centre of the Town, rent free.
Cllr Nigel Kay F.C.C.A., A.C.I.B, C.T.