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grey_man

Grey_man's back on his hobby horse

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Below, from The Times with a worrying conclusion. Did anybody pick up on the news in the business media that WBC has just shelved plans to spend £220 million on commercial property that was on the market for £200 million? They need to be coming under far more scrutiny from councillors, the government and the media. I suspect that their current investment strategy is now a millstone for the town. 



 Authorities’ big gamble on property deal-making puts locals on shaky ground

Martin Shortland spends most of his time working as an IT consultant, but last year the 52-year-old declared war on Spelthorne council.

Frustrated by what he sees as a lack of transparency at the Surrey authority, which has racked up £1bn in debt by buying commercial property, Shortland set up It’s Our Spelthorne, an action group that aims to hold local representatives to account.

“If council taxes aren’t going up and services are still running, people don’t really care because they don’t feel it is affecting them,” said Shortland, from Ashford. “But what’s going to happen if this all goes pear-shaped?”

Over the past five years, a raft of local authorities have tapped cheap government debt to splurge more than £6bn on commercial property, according to estate agent Savills. The coronavirus crisis means that their residents could end up paying through higher taxes or degraded services.

With the nation’s shops, bars and restaurants forced to shut, only about a third of their £2.5bn of quarterly rents were paid last month. Cash-strapped tenants are unlikely to loosen their purse strings by the next quarter. Some will simply not survive.

“These retail centres are quickly going from being a cash generator to a cash drag for councils. Ratepayers will end up with a load of council-level debt racked up from bad decision-making,” said Sam Resouly, a partner at investment firm Trinova.

In many instances, local authorities have bought shopping centres in their own areas from private owners too beset with debt to invest in improving them, aiming to bring on regeneration.

More controversially, some councils, such as Spelthorne, have bought elsewhere, hoping that the income generated will exceed the debt costs and offset some of the 25% budget cuts they have suffered in the past decade.

Spelthorne spent £40m in February on the Elmsleigh centre in Staines, where the council is based. Tenants include troubled retailers such as Topshop and New Look. The office provider WeWork, which is skipping rent payments in an attempt to survive, is lead tenant at a west London block bought by Spelthorne for £170m in 2018.

Councils typically take out cheap 30 – 40-year deals from the Public Works Loan Board (PWLB), which does not cap the amount they can borrow or require them to prove they can afford it.

The debt binge has caused alarm at the Treasury, which increased the PWLB loan rate last year by one percentage point to 2.8%. Concerned that property speculation was depriving councils of finance for more conventional projects, the Treasury opened a consultation last month on revising the lending terms.

Councils are on the hook to the private sector, too. Some have used “income strips”, where institutional investors make an upfront payment in return for inflation-linked repayments over decades.

Two years ago, Gravesham council in Kent struck a 50-year income-strip deal with Aviva to finance the redevelopment of a tired retail mall into a bright and airy arcade. Last week’s launch party for the Rochdale Riverside centre was scuppered by Covid-19, but the Greater Manchester borough’s ability to pay down £80m of inflation-linked debt over 35 years may cause a far bigger headache.

Since some of these deals were struck, the retail market has worsened significantly. Councils have spent £1bn on shopping centres in the past four years and bought more than a third of all those sold last year, according to estate agents Knight Frank. Analysts at Jefferies forecast that rents will fall by 14% this year and by another 7% next year.

“Using income strips on shopping centres with public money is scandalous. Some of these council leaders will end up in front of select committees over this,” a leading property agent said.

While many in the private sector are quick to criticise councils, they look at investments on a shorter time horizon than public sector bodies, which are also motivated by broader societal and economic benefits. “People working for councils are not muppets. Are they experts on shopping centres? No. But do they understand finance and risk? Yes,” said Mark Williams, a director of the investment firm RivingtonHark.

Councils cannot be blamed for failing to foresee the coronavirus carnage, but that does not mean it will not hurt. According to Tony Travers, a professor at the London School of Economics, PWLB repayments rank above all other council outgoings — meaning that while the risk of outright default is negligible, some authorities will be forced into raising taxes or cutting services.

 

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I would think this corona outbreak is going to be an even bigger knife in the back of High Streets & shopping centres when you consider that many more people will now have dipped their toes into the waters of online shopping.

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6 hours ago, Davy51 said:

I would think this corona outbreak is going to be an even bigger knife in the back of High Streets & shopping centres when you consider that many more people will now have dipped their toes into the waters of online shopping.

To be fair to the council I think this is why Time Square is the right thing to do. But even that is - at best - going to be harmed by what is happening. Cineworld was already a bit wobbly even before this and I can't see any of the bars and restaurants they may have been in conversations with going unaffected either. 

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And from The Guardian

 

MPs investigate commercial property purchases by councils

Parliament’s spending watchdog has launched an inquiry into purchases of commercial property by local authorities, amid fears that the coronavirus pandemic will expose councils to a drop in income from their investments.

The public accounts committee will look into whether local government officials have the commercial skills required for such transactions, which have rocketed over the past four years. MPs will also question officials from the Ministry of Housing, Communities and Local Government over how much they monitor commercial activity among local authorities and their exposure to risk.

Local authorities have been on a shopping spree in recent years, buying up property such as shopping centres and office buildings as a means of increasing their revenues and to offset the impact of austerity measures introduced in 2010.

A recent report from the National Audit Office (NAO), which scrutinises government spending, found that local authorities spent an estimated £6.6bn on commercial property from 2016-17 to 2018-19, compared with £460m during the preceding three years.

The pandemic is expected to create a hole in councils’ budgets due to a huge shortfall in council tax income, along with lost revenues from missed parking and leisure fees during the coronavirus lockdown.

Ministers are expected to provide English councils with a £1bn bailout to prevent several of them from collapsing into insolvency due to soaring costs related to the coronavirus crisis, such as for providing extra social care and housing rough sleepers during the lockdown.

Even before the government lockdown created uncertainty about local authorities’ income, the NAO report warned of the risks associated with commercial property, which could leave councils badly exposed by a recession or property crash.

“Income from commercial property is uncertain over the long term and authorities may be taking on high levels of long-term debt with associated debt costs,” the NAO said.

Councils have been able to access low-cost funding from the government’s public works board, but critics argue it has caused them to bid higher amounts for property, and in some cases overpay.

Spelthorne council in Surrey, a tiny Conservative-controlled authority, has used these Treasury-backed loans to build a £1bn property portfolio, despite its annual operating budget of £22m. The council said last year that income from commercial property allowed it to offset £2.5m of government grants cuts, and raised more income than council tax.

Shropshire council has previously been criticised for spending £51m on three shopping centres in Shrewsbury, all of which had fallen in value by almost a quarter even before the pandemic.

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This is not going to work out well anytime soon. The council will be under pressure to reduce rents as well as losing business rates for some properties in Warrington. The food shops outside Warrington will not be as badly affected but overall there will be losses. The bank shares will take a lot longer to sell too, so the hoped for sale value will not materialise. The net effect will be that at a time when the government allows a looser reign for most councils Warrington may well end up having to make more of the efficiency it should have made years ago thereby reducing services because Warrington councillors thought they deserve more than every other council in England.

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I suspect it's already a car crash and some of it would have been a problem without what is happening. The argument that the council has been fond of making - that it's low risk because of the underlying value of the assets - looks increasingly frazzled. For those investments with little or no asset value - Redwood and Together Energy - other questions should be asked and not just by keyboard warriors like me. Councillors should be doing their job.  

I also wonder when the local media (I'm watching you :)) will report on that story that the council has decided not to go ahead with the £220 million purchase of a property portfolio in Trafford that was on the market for £200 million. Maybe local journalists are unaware but it's been in the regional business press. Again, there needs to be far more scrutiny of this and the reasons behind it.       

PS - The council's Moody's rating was downgraded last year. Normally WBC issue a press release about their healthy credit rating but not this time even though the rating remains good. Also Moody's notes that one of the reasons the council enjoys a good rating is because the government won't let a council fail completely. 

 

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