Council property investment that benefits the local community shouldn't be curtailed

In December 2017 West Lindsey Council invested in a Travelodge hotel that was 75 miles outside its boundary, for ￡2.35 million.

Normally a transaction of this size wouldn’t make regional headlines, let alone national - particularly given the size of recent property investments by other councils, such as Spelthorne acquiring the BP International Centre for ￡360 million.

However, this story made the BBC. With West Lindsey Council one of those caught up in the Icelandic banking collapse in 2008-2009, the question being asked by residents and the press was: are local authorities set up to be successful commercial investors in real estate?

Since 2010 the budget of the average local authority has reduced by approximately 40%, leaving non-statutory services wafer thin including the in-house estates team.

In fact this is driving some councils to share in-house teams, outsourced estates contracts and even estate directors. In Worcestershire, six heads of estates and their teams have been replaced by a company with a single MD.

There are no accurate statistics on the extent to which local authorities are involved in the property investment market, but an indication of the rising popularity is that, between 2015 and 2017, the volume of capital finance used to acquire land and buildings in England almost tripled to ￡2.8 billion, according to government data (DCLG).

This is an investment spree that has been fuelled by the opportunity to borrow money at a low rate of interest from the Treasury through the Public Works Loans Board. The borrowed money has been invested in buying and developing a broad swathe of property types, including shopping centres, hotels, market residential apartments, offices, car parks, ferry terminals.

Such initiatives can pay handsome dividends, with local authorities benefiting from new revenue streams, as well as often delivering social returns and supporting regeneration. 

However, this could be set to change. The Government has got cold feet and has recently concluded a consultation exercise on new guidance. Ultimately we could see a curtailment on borrowing limits translating into less property acquisitions by councils.

What is wrong with local authorities investing in buildings if it means more money to collect the refuse, look after local children, repair the roads and improve the planning service?

Property has outperformed bank deposits and stocks and shares over the long term; pension scheme portfolios include property as part of their de-risking strategies; local authorities can commission sophisticated advice from the best property consultancies and can build a balanced portfolio. Moreover, by controlling key buildings and developments they can shape regeneration schemes, ‘place make’ and attract business activity that is aligned to their economic strategy.

Legally, local authorities have wide powers to deliver for their communities, as the Localism Act 2011 gave them the general power of competence to do pretty much anything that individuals may legally do. Therefore, the local authority is allowed to determine itself how much it borrows based on prudential measures of what it can afford.

The problem is there are indicators that a crowd psychology is forming and the general prevailing mood is property investment is becoming normal; yet there are no clear criteria for judging whether a local authority investment is prudent or injudicious.

A chief executive recently confided that she feels under pressure from her cabinet members to buy commercial properties outside her local authority’s boundaries and indeed region.

The issue is that while there are some seasoned ex-bankers, property developers and other industry professionals in council employment who can evaluate property risks, the strength of most council employees is in providing public services.

Shifts in the economy that increase financing costs, inflate construction prices, reduce rent inflation and lower residential market prices can tip a local authority controlled development or speculative investment into the red. When there is an economic downturn it could well be the local taxpayers picking up the pieces.

Where does it stop - could we see UK local authorities speculating in Asian Smart Cities?

We now await the results of this consultation, but I expect commercial property investment to remain a viable option for local authorities who are looking for diverse income streams, but with new requirements on councils to make the source and use of property investment income more transparent.

I expect that property investment outside council boundaries will also continue; in the medium term we could see caps placed on the amount that councils can borrow, should growth continue unchecked.

Above all, councils need to put in place the necessary governance that is commensurate with the risk, and they must ensure that managers are sufficiently expert to ask the right questions of external advisors.

This will help to ensure that the benefits of real estate investment (namely, the protection of local services and suppressing council tax increases) are realised.

Guy Brett, Senior Director Strategic Advisory