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Government to close down council borrowing to generate income

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From the FT today. 

 

Auditor raises alarm at £6.6bn council property spree
Fourteen-fold increase in deals as local authorities seek to plug funding gap


The UK government’s spending watchdog has raised the alert over local authorities pouring billions of pounds into commercial property at a time when many private investors are shying away from the sector.

The National Audit Office found councils had spent £6.6bn on shops and offices between 2017 and 2019, a 14-fold increase compared to the previous three years.

Meg Hillier, chair of the public accounts committee, said it was understandable that councils were carrying out “risky investments” to get more money in.

“However, a fourteen-fold increase in spend on commercial property raises serious alarm bells,” she said. “The [communities] department needs to take stock and ensure that there is protection for local taxpayers from local authorities acting as investment bankers. ”

The NAO found the investments were focused on a small number of local authorities, with 49 out of 352 carrying out 80 per cent of the deals. Local authorities in the south east of England were highly active, accounting for 53 per cent of commercial property spending in the past three years.

Spelthorne borough council in Surrey has blazed a trail, building up a portfolio of nearly £1bn of commercial property including BP’s £358m business campus in Sunbury-on-Thames. Other big spenders include Warrington borough council and Eastleigh borough council.

Councils investing in property have seen “significant increases” in debt and in the cost of repayment, according to the authority.

Some councils have justified their purchases as a way to ensure the survival of shopping centres or offices in their local areas — or to carry out regeneration projects.

Local authorities face potential investment risks from buying commercial property, such as in the event of an economic recession or a downturn in a particular economic sector. But many have been investing in other parts of the country: 38 per cent of spending in the three-year period was on properties outside the buying council’s own geographical area.

The NAO said there was a growing trend of authorities speculating in real estate to make up for deep cuts to their budgets: “A key motive of some authorities’ recent investments in commercial property has been generating rental income in order to offset reductions in their funding.”

Local authority spending power — a mix of government grants and council tax — has fallen by 28.7 per cent in real terms since the start of public spending cuts in 2010-11. In a review of 45 authorities’ strategies for investment, the NAO found that all but three identified generating income as a significant objective.

“Local authorities face potential investment risks from buying commercial property, such as in the event of an economic recession or a downturn in a particular economic sector, particularly where authorities are dependent on their rental income to keep up with debt repayments or fund local services,” the watchdog said.

“The scale of spending and borrowing by some authorities in recent years leaves them potentially exposed to these risks.”

Retail property in particular has been under relentless pressure with rents falling as competition from online shopping has forced traditional outlets into administration.

Some councils had mitigated risks by recruiting specialist staff, undertaking due diligence and using external expertise. “Nonetheless, local external auditors indicated to the NAO that there was room for improvement in the governance and risk mitigation arrangements of some authorities,” the report said.

The Ministry of Housing, Communities and Local Government (MHCLG) is responsible for the framework of statutory codes and guidance that set the parameters for local authority borrowing and capital spending. It has recently tightened up that guidance.

But the NAO said: “Recent activity has raised questions about the extent to which MHCLG can rely on the framework in its present form to support local authorities to make decisions which provide the taxpayer with good value for money.”

The NAO identified various risks including “specific risk” — such as the length of the lease of the financial strength of tenants — as well as “systematic risk” in terms of market movements in commercial property.

“In recent years, systematic risk is apparent in the performance of the retail sector with the shift to online sales, among other factors, leading to growth in vacancy and void rates,” it said.
 

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