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Government to close down council borrowing to generate income

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From The Times
 

Ban on local council investments in risky property portfolios
Andrew Ellson, Consumer Affairs Correspondent
December 27 2017, 12:01am, 
The Times


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?”

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4 hours ago, grey_man said:

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.

A get out clause for any Council worth their salt and a way with words.

A retail area could be bought and the argument made that it does benefit the residents. If it is owned by the council the argument could be that they can keep it running and thus the residents will have somewhere to shop. if they don't buy it then it could close and then the residents would have to go elsewhere to shop and the space could be left derelict and be a hazard to the residents due to rats, anti-social behavior and the like.

and..............................

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Presumably, Councils, like the wealthy, will seek to maximise returns on their (our) capital. For us lowly Plebs, putting cash into a bank as savings offers little return and has probably been devalued over the years with QE etc.    :ph34r:

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2 hours ago, Evil Sid said:

A get out clause for any Council worth their salt and a way with words.

A retail area could be bought and the argument made that it does benefit the residents. If it is owned by the council the argument could be that they can keep it running and thus the residents will have somewhere to shop. if they don't buy it then it could close and then the residents would have to go elsewhere to shop and the space could be left derelict and be a hazard to the residents due to rats, anti-social behavior and the like.

and..............................

I don't think that is what this refers to.

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I think any borrowing to invest in the retail sector should be tempered with caution by any local authority finance department...as far as retail is concerned the rise of internet shopping is putting the skids under the way people shop & as the older generations cease to shop traditionally who knows where the internet boom will take us. As for commercial (industrial/office) developments most go forward towns have to be cautiously ready to up the tempo of their building projects to cater for business & housing demand. Warrington has developed successfully since being first designated a new town &  has developed too well for its road network !

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Davy, I agree with you on the retail sector point in terms of investment by councils. I wonder what others think of the reported proposal for WBC to create two building operations to build at least 500 homes. The timing seems to me anyway to suggest that they may intend to build at the Slutchers Lane site which would support that number of homes IIRC. They would be walking distance from Town, Bank Quay and the bus services on Chester Road would be accessible over the new bridge that is already due to be built. 

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And an update from The Times. One day it might be a big enough story for the local press. :)
 

New curbs on councils to stop multimillion-pound gambles
February 10 2018, 12:01am, 

Ministers have imposed new curbs on councils using cheap borrowed cash to stake multimillion-pound bets on the commercial property market.

Local authorities must take more care to avoid undue risk when making investment decisions under guidelines from Sajid Javid, the housing, communities and local government secretary.

Councils are also under a new obligation to ensure that relative amateurs are not staking huge bets as they chase returns to replace revenue lost through government cuts.

Councils spent almost £2.8 billion on land and building in 2016, more than double the figure for the previous year. The trend, exposed in an investigation by The Times, sparked fears that low-cost Treasury loans available to local councils are fuelling a dangerous boom.

One local authority spent £422 million in 2017 alone with the tiny Spelthorne district council in Surrey investing £10,600 for every household.

Some councils were also found to have invested in commercial property assets such as shopping centres in areas hundreds of miles away. Last year, the Tory-run Mole Valley council in Surrey spent £11.5 million on an Asda supermarket in Ystalyfera, near Swansea, despite analysts believing that out-of-town supermarkets have a bleak future because of online shopping. Investors were “amazed” at the price it paid.

Local government finance chiefs justified the investments on the grounds that ever-greater pressure to deliver services while keeping council taxes low compelled them to look for other sources of income.

MPs on the public accounts committee warned the investments were in danger of getting out of hand. Meg Hillier, its Labour chairwoman, welcomed an official review launched last year. Ms Hillier, who has warned that the boom risks echoing the collapse of Icelandic banks when councils were revealed to be over-exposed to one market, said it was overdue.

Guidance issued last week by Mr Javid compels councils to be more transparent about the risks of investments but stops short of setting limits — an idea mooted in the consultation. It also says that they should prioritise security over yield in choosing investments.

It says: “Authorities must not borrow more than or in advance of their needs purely in order to profit from the investment of the extra sums borrowed.”

It adds that where a local authority chooses to disregard this guidance, it must say why and what it is doing to manage the risk.

Critics argue the rules do not go far enough. They say it is a public policy failure to let councils borrow to speculate in commercial property but not borrow to build council homes when there is a housing crisis.

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Well if the forecast of increasing Council Tax bills comes to fruition, they'll have even more cash to play with.   It may help if they concentrated on statutory services though.   :ph34r:

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The sooner this bunch of money grabbing bas**rds are removed from Westminster the better, my only problem is who replaces them???.

Apologies Dizz, not like me to swear openly but these political idiots are really winding me up at the moment!.

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