From The Times
Ban on local council investments in risky property portfolios
Andrew Ellson, Consumer Affairs Correspondent
December 27 2017, 12:01am,
Councils will be banned from borrowing to invest in commercial properties amid concern that they are putting taxpayers’ money and local services at risk.
The Department for Communities & Local Government (DCLG) has outlined rules that will stop councils borrowing money to fund the purchases unless they benefit local residents.
The plans, which have been published under a consultation, are likely to derail many councils’ investment plans, which can include buying shopping centres, retail parks and supermarkets. Earlier this year an investigation by The Times revealed that local authorities were making multibillion-pound bets on commercial property to replace revenue lost through government cuts.
Freedom of information requests to every council in the country found that they had paid £2.7 billion for commercial properties since 2015, up from £500 million over the previous three years. Much of the money was borrowed from the Public Works Loan Board.
Experts warned that some councils were building “exceptionally risky” portfolios with little or no investment experience, raising concerns that services would have to be cut or taxes increased if the property bubble bursts.
Now the DCLG wants to stop councils from borrowing solely to generate a rental income. The consultation document says: “Borrowing solely to invest in a yield-bearing opportunity is borrowing in advance of need.” Borrowing in advance of need is banned under local government finance regulations.
The rules will not prevent councils buying commercial property out of existing revenues or reserves but few, if any, have enough spare cash to do that.
Professional investors hailed the new rules, saying that councils’ spending sprees were driving up commercial property prices. In parts of the country local authorities make up a third of buyers. The cross-bench peer Lord Oakeshott of Seagrove Bay, chairman of OUM Property fund managers, said: “The government has woken up to this gross abuse of public money and cracked down on councils gambling on property at long last . . . Why has it taken so long and so much forensic investigative journalism before it was stopped?”