Philip Hammond’s expected budget crackdown on council commercial property investment could stop councils using Treasury cash to spend on deals outside their own local authority boundaries.
Last week, Room151 revealed that leading figures from local government finance are expecting Hammond to signal new rules surrounding Public Works Loan Board borrowing.
Experts fear that the move could effectively restrict councils to land and property purchases which boost regeneration on their own patches.
Sean Nolan, director of local government at the Chartered Institute of Public Finance and Accountancy (CIPFA), told Room151: “We understand that the Department for Communities and Government (DCLG) will very imminently consult on changes to the investment regulations.
“These could prohibit borrowing solely for the purpose of procuring commercial property yield.
“The main impact of the prohibition would fall on borrowing to fund purchases outside borders, where it is more difficult for councils to argue wider economic benefits from the investments.”
Some experts have voiced concerns that any such move could create a “postcode lottery” that increases the gap between rich and poor councils.
Neville Pritchard, director of capital markets at property adviser JLL, said: “Investment opportunities for councils in poorer areas of the country would be restricted by this move.
“The quality of assets they would be able to buy would be limited and they would struggle to find too many income streams.”
A senior figure in the local government finance world, who did not want to be named, said: “This would be fine for those authorities with advantages in terms of their location, such as those in the M4 corridor. But it would hit seaside coastal towns or those in the middle of nowhere which don’t have the same demand from business occupiers.
“It would reinforce the gap between the haves and the have-nots.”
Currently, a number of councils have used PWLB borrowing to make purchases of property outside their areas.
But there is disagreement on whether it is legally necessary to do so through a standalone company, with councils opting for different approaches.
Some have questioned how easy it would be for the government to frame a watertight restriction preventing property investment.
Gerald Almeroth, strategic director of resources at London Borough of Sutton, said: “Whatever they introduce, some councils could work out how to get round it. How would they stop councils borrowing from PWLB to buy a property in their area which they sold a year later to spend the proceeds on a property further afield?”
Ironically, the largest commercial property deal by a local authority—Spelthorne District Council’s £360m purchase of a campus occupied by oil giant BP—was within its own boundaries.
Some in the sector have blamed the scale of the purchase for alarming the Treasury, prompting expectations of a crackdown in the budget.
But Nolan said that other options are open to the Treasury to dampen down council’s enthusiasm for borrowing from PWLB to fund property purchases.
“We understand the Treasury is looking at incorporating changes similar to those that CIPFA has proposed in the Prudential Code in terms of raising the bar around due diligence and proportionality.”
CIPFA president Andrew Burns, director of finance and resources for Staffordshire County Council, said the Treasury could also adjust minimum revenue provision (MRP) rules in a forthcoming consultation.
He said: “It is possible they could tighten the MRP rules so that councils have to pay back their borrowing more quickly, reducing the attractiveness.
“They might also say they would only let councils borrow 80% of the value of a property purchase, similar to a retail mortage.”
There is scepticism in the sector that the Treasury is looking at a crackdown due to concern for wellbeing of local authority finances.
One anonymous source said: “This seems to be more about the government listening to private property developers complaining about competition from councils more than concern for councils taking risks with their investments.”
Almeroth added: “We are not even outbidding the private sector. We have looked at more than 200 propositions in the past two years. We only bought five and in these cases we were mostly the only bidder.”