One of the most troubling trends in local government finances in recent years is the move by councils into commercial property. Not actually building much, although it’s hardly unheard of, but buying it, using low interest rates to borrow large sums of money. The theory is that, with returns on commercial property higher than interest rates for borrowers, councils can earn a profit in the investments, using the funds to support local services.
It hasn’t gone unremarked, and I wrote about this in December 2018. Of course, since then, the pandemic has had some dramatic effects on commercial property, with the market slumping as retail outlets go under, shopping malls fail and white collar employers in particular pivot towards having staff work at home at least some of the time.
That may not last forever – one of the interesting issues arising from the impact of COVID-19 being “will the short-term impacts become longer-term ones?” – but if it does, and asset values fall, who steps in to pick up the tab?
For 2021/22, local councils will be able to raise council tax by 3% to cover the increased costs of social care, leaving only 2% leeway to cover anything else before triggering a local referendum, which for many district councils would eat up the additional income raised. How then will the loss of revenue from their investments be made up? And, as the London Borough of Croydon has recently demonstrated, getting your investment strategy wrong means, in the worst case scenario, savage service cuts.
And now, to make matters worse, the right to borrow money from the Public Works Loan Board (PWLB) to invest in commercial property has been withdrawn as part of last week’s Spending Review (see paragraph 7.22). The Government had raised the interest rate for borrowing through the PWLB to discourage its use for property speculation, but this clearly didn’t have the desired effect. On the plus side, the rate has been reduced which will benefit local authorities investing in infrastructure.
This is the time for Liberal Democrats to campaign for rectitude in local government spending. That doesn’t mean making cuts, it means thinking about how intelligent investments can lead to savings elsewhere in the budget, making holistic choices. So, for example, borrowing to invest in new social housing, or affordable homes where a modest profit can be reinvested whilst enabling tenants to get onto the property ladder. By doing so, housing waiting lists can be reduced, and the use of public funds to support private landlords can be cut.
Local councils shouldn’t be gambling on commercial property, and if voters knew what risks were being taken, they almost certainly wouldn’t appreciate it. It’s an opportunity to attack Conservative authorities for financial mismanagement, and we shouldn’t miss it in advance of next year’s local elections.
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18 Comments
And then there is Brexit; apart from any Economic effects Britain is now seen as a less friendly destination for Immigrants. Less people, or at least a slower growth in population means less demand for Property of all sorts.
Some local councils have made some very dubious decisions in recent years by investing in property. Mind you, not that many years ago some got their fingers burned investing in Iceland and the dot com boom.
For someone who wants local government to be given a greater opportunity to run more of its affairs this is clearly not helping the case. When are we going to get away from this faith in bricks and mortar to deliver a massive profit? By the way, Labour controlled councils have been bitten with the same bug.
Whilst I get what Mark is talking about, I think we do need to be careful.
Anyone who is familiar with Milton Keynes will know about the Parks Trust, who manage all the parkland in Milton Keynes and are able to do this through the foresight of the Development Corporation who gifted a number of commercial properties to the Parks Trust; the Parks Trust gaining the lettings revenues to fund the parks maintenance. From this I suggest there is role for commercial-to-let property in the financing of local public services.
Secondly, with the 2020 arrangements for Business Rates (local government are to retain 100% of these instead of getting funding from Central government, the income of local authorities will be hit by the downturn in commercial properties. regardless of whether have or have not directly invested in commercial proprerty…
Governments can borrow at low rates to finance their budget deficits. Councils are not allowed to do this but can borrow capital at low rates. So all the incentives are there for them to find creative uses of capital to generate revenue and bridge budget gaps. It is , of course, incredibly risk to put all your investments in one sector.
As a general principle, government bodies, whether national or local, are not competent to make commercial investments, and should not do it.
Local authorities setting themselves up as property entrepreneurs was always going to end badly. They should never have been allowed to do it. Nor should they be allowed to invest in any other commercial ventures.
@ Mohammed,
I think that there’s a difference between property speculation and commercial ventures as a whole. The idea of, say, a local council creating a commercial arm to utilise spare capacity in its organisation might be a valuable way of subsidising the council’s day to day service provision. And, indeed, building properties to lease out to businesses needing space might have value, in support of a local economic development policy.
What I genuinely worry about is property speculation intended primarily to bridge gaps between income and spending, especially when councils are investing outside their boundaries.
They should probably invest in scotch egg manufacturers!
Mohammed Amin has a point; investment expertise is not a core skill of councils and higher governments. Worse still, even professional investors and advisers can get badly caught out. There may, however, be cases where the council and people can benefit from suitable development partnerships. The worst circumstance for decisions on investing or depositing funds is sheer desperation, and this is a hazard when public money is scarce,
So such decisions must be taken after a realistic assessment of the risk and consideraion of what can be done if it goes wrong.
Might it be more efficient if central government, and its associates, returned more of the taxes and other financial inputs into local government so that localities have the resources to motivate and support their people without taking almost enforced risks?
Might the C virus have again reminded us that poverty results in ill-health, diminished life and premature death?
Might this help us to review our beliefs and assumptions on economics which have increased the physical, social and economic damage done by weakening large sections of our nation through “Austerity”?
Might we work towards emphasising resources, of which our people are the leading one, rather than the current rather dodgy theories of book-keeping etc?
Ultimately, I suspect most councils are only borrowing to invest in commercial property because they are not allowed (as I understand it) to borrow to build housing, which would save them money on housing benefit as well eventually.
I think that more Councils have started to ‘dabble’ in such commercial investments because since 2010 over 40% of Government funding has been withdrawn and only partially replaced by changes to Business Rate retention and the New Homes bonus scheme. Plus of course interest rates are so low.
That doesn’t mean they were wise to do so -‘bankrupt’ Croydon for example borrowed £200Million to buy a shopping centre and has had precious little return. But Government has actually encouraged Councils to bring in new income from commercial activities.
Returning to being Cllr in 2019 (after a 16 year absence) I was quite surprised at how much a Cons Govt was promoting commercial income for Councils. When I was first elected as a Cllr in 1987, Thatcher’s Conservative Govt was actively dissuading Councils from such activities ‘because they had an unfair advantage over private sector companies.’
Um…
From afar Croydon does seem to have been very mismanaged – including it seems having very small reserves for contingencies and I’d be surprised if its treasurer hadn’t given the councillors ¹several warnings – if not then they’d be failing in their duty. If they did then this has been a political decision by the councillors.
In general if you can borrow at x% and get a return of x+y% then that makes a lot of financial sense while managing the risk which is the council’s financial team’s responsibility overseen by the councillors.
There has been quite a long standing tradition of councils owning things and businesses. Luton Council i think owns Luton Airport. Portsmouth owns the commercial port there, I think Eastleigh owns the rose bowl cricket ground etc. Obviously this has increased in recent years due to the positive return that coumcils could get on by borrowing cheaply from the government and taking that mo ey and getting a positive return.
But in general if you can invest at a greater return than you can borrow it makes sense to do so if you can manage the risk. As a Councillor we used to get reports on short term (and from memory medium term) straight forward “bank account” and bond investment as most councils have cash and reserves they don’t immediately need to spend and not all of this was at AAA÷ rating because it is worth managing some risk to get a better return but over a portfolio of investments to mitigate the risk. Luckily our treasurer stayed clear of Icelandic banks!
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For clarity as far as I am aware councils only administer housing benefit – all the money comes directly from central government and the council is only a conduit for it.
Trouble is councils have invested in underlying assets which have decreased in value. It is not the return today but when the loan needs to be repaid. A major property company like British Land has signalled tje problem with its High Street property portfolio and they lnow the ropes. And this was before Arcadia and Debenhams vreated a massive distressed sale overhang. I am afraid Croydon won’t be the only case of unwise imvestmemts and a major problem.
As a member of a Lib Dem council administration (in Watford) that has successfully invested in property, thereby providing a revenue stream that helps us to protect services and avoid cuts, I entirely disagree with this article. I know that many councils (Lib Dem ones included) have taken a similar approach to us.
We are a party that believes in decentralisation and local decision-making, and decisions about how councils invest their money should be made at local level, and be the Lib Dems should not be campaigning on a blanket basis against councils being entrepreneurial in their use of public funds.
Such diversification of investment does not preclude councils also investing in benficial projects such as affordable housing or in promoting jobs and employment within their areas. Michael 1 points out various examples of councils deriving income from commercial activity.
All councils of whatever political colour should be held to account for their financial management by opposition councillors and ultimately by voters. The fact that one council makes poor decisions does not mean that councils generally should not be able to take such decisions.
This article can only have been written by someone who knows absolutely nothing about Local Government Investment and Finance other than the bad headlines written about those handful of Councils who have invested really badly. Some businesses do too
. The simple fact is that sensible targeted investment in property to create for eg more short term accomopdation to reduce housing costs on for eg bed and breakfast accomdoation , or to increase a Council’s income by buying back a head lease on an industrial park or by building a highly sucessfil inovation centre all of which we have done in Maidstone is a good use of borrowing and investment powers, and also helps prevent unnecessarily severe service cuts by creating a revenue stream .
Generalisations about commercial property shouldn’t be made. While conventional retail may be in decline warehousing continues to be a sound investment, both major hubs and smaller local hubs. Moreover while there have been downturns in commercial property in the past, historically property investment has in the long term been seen as providing more stable returns than equities, albeit lower, but better returns than bonds.
Some interesting comments here, perhaps aided by a slightly quirky interpretation of the original article. Nowhere does it say that councils shouldn’t invest in commercial property – there are excellent reasons for doing so sometimes, especially if such investments are part of a development strategy for the community the council serves.
But given that some councils made the decision to deny themselves long-term revenues by accepting Government grants in return for freezing council tax levels over several years, they may well have felt obliged to follow some of the pioneers in the field of commercial property investments.
Central government does bear some of the responsibility though, limiting local authority powers to set council tax rates via referenda, increasingly cramping discretionary spending by replacing general support with dedicated funds. When your options are limited, you’ll tend to reach for slightly less orthodox ways of making ends meet.
But when the professionals are heading for the door, is it really wise for local authorities to move in?
The problem is that councils have had so much money taken away from them that they are between a rock and a hard place. Some councils (e.g. Basingstoke and Deane and Test Valley) have done well with commercial property but we all know there have been horror stories with other councils. In fact the CCLA investment fund which councils can invest in has returned 13.5% over the past year so there are other options for their money. My own view is that councils should be allowed to invest in residential property (because it is part of their remit to provide more housing) but shops and retail units should be off their menu. In fact, if councils could be forced to invest in social housing developments which are then sold to housing associations at a fair market value (i.e. not £1) or leased then this would be an even better idea.