Gloucester City Council has announced that it is borrowing £80m to invest in property.
The council last week voted to create a property fund entirely consisting of borrowing from the Public Works Loan Board.
The council says that a portfolio of this size would help it close an income deficit of around £2.6m across the next four years by raising annual income of around £500,000.
David Norman, cabinet member for performance and resources at the council, said “Although property investment is a risky business, we have been fully briefed on how the property portfolio will be managed and risks will be mitigated.
“We’ll be taking expert advice from industry professionals to help inform the decisions and we can mitigate risks through very strict investment criteria.
“We have to diversify to help generate income in the future and we’ve spoken with other local authorities who have taken this approach and been very successful.”
A report by council officers said the overall investment quantum and strategy is “designed to provide sufficient income to cover a meaningful proportion of the entire predicted budget gap”.
The council said that although it would use receipts from land sales to help finance acquisition costs, the main source of financing would be from borrowing.
The £80m borrowing would be among the largest loans taken by a local authority from PWLB to fund property investment.
“The initial loan to value ratio would be close to 100%, and this creates a risk that members should be aware of,” according to the officer report.
The new portfolio could take up to seven years to acquire, and would be overseen by a new property investment board, which would be disbanded on completion of the final transaction.
Housing schemes could also be included within the portfolio, if the yield is deemed attractive enough.
The section 151 officer would be authorised to approve purchases of up to £15m, in conjunction with the investment board.
Purchases above that sum would be referred to the council’s cabinet. The net initial yield (NIY) range that the council expects to achieve on any investments is likely to be between five and nine percent, it said.
Should the portfolio yield drop below 5.75%, a review of the strategy will be triggered, according to the council documents.
The council will go out to tender later this year for an external partner with property experience to help identify and assess potential acquisitions and to help manage its property portfolio
Paul James, leader of the council and cabinet member for regeneration and economy, said: “We have to make £1.65m of savings in the current financial year alone, and property investment will be a step which many other local authorities have taken; they have proved this can be a successful way to raise funds.”
The move has not gone down well in all quarters, with the council’s Liberal Democrat leader Jeremy Hilton (Kingsholm) quoted in a local paper as saying: “This is one of the most reckless things I have seen this council do. If you get this wrong you could bankrupt us.”