RISKS and potential rewards behind the purchase of a Teesside shopping centre have been revealed.

Stockton Council agreed a deal to snap up Wellington Square Shopping Centre for £7m last week after councillors agreed to purchase the High Street site in December.

But a report seen by the Local Democracy Reporting Service shows how councillors agreed a price of £9.5m for the precinct – £2.5m more than the eventual purchase price.

The document shows how a “net rental income” of £975,000 a year was forecast to come from the 200,000 sq feet of floor space at the site as of last December.

However, in the time since councillors agreed the buy up, Debenhams has signalled its intention to close its Stockton High Street store in 2020.

Darlington and Stockton Times:

Copy of council document

The identity of the “significant town centre site” was kept under wraps for reasons of “commercial sensitivity” during negotiations before it was officially unveiled yesterday (May 8).

The ground floor of the Debenhams is part of the Wellington Square deal – and Stockton Council is “seeking a meeting” with the owner of the rest of the building to find a use for it after its expected closure.

The authority is banking on using rental income from shopping centre rents to spend on reinvesting in other borough town centres later on.  

The plan is for a surplus to be kept once money comes in to manage any risks – before the council then looks at reinvesting the money in town centres.

External auditor KPMG was appointed to review the risk and financial expectations from the shopping precinct buy-up.

Rental income from the shopping centre is marked down in the report as £975,000 per year.

But it added a number of other leaseholds on the town centre site were ending in the next 15 years to “give the council the opportunity to re-negotiate agreements”.

However, the assessment notes there is a risk that this rent income could fall.

After stamp duty, land tax and fees were added on, the report stated the cost of the shopping centre would be £10.2m – and the cost of borrowing to pay for that sum for 35 years would be about £450,000 per year.

But given the purchase cost was negotiated down to £7m, about £7.5m after tax and fees, this borrowing cost will now be lower.

Financial forecasts drawn up by KPMG showed a “base position” with occupancy rates of 66% would bring in a net £518,000 per year.

If occupancy rates fell to 51 per cent in the next three years, and the shops remained empty, the report added there “would still be a surplus of £114,000 per year”.

“The centre would need to operate at occupancy rates below 50 per cent for the 35 years of the loan to mean that costs exceed income,” the report added.

The council report summed up saying KPMG was satisfied that while there was a risk income could fall, the risks were “likely to be manageable”.

Stockton hasn’t been shy of borrowing money to invest in town centre schemes.

It is borrowing £17m over the next 35 years to fund the Hampton by Hilton Hotel and £2.5m to cover repair costs at the Globe Theatre further up the High Street.

Knight Frank, which runs the nearby Castlegate Shopping Centre, has been brought in to manage Wellington Square on the council’s behalf.