A council has agreed a deal with a neighbouring authority to run its revenue-generating property investment strategy—one of two deals accounting for £200m in borrowing from the Public Works Loan Board this week.
The appetite among local authorities to borrow cheap money for property transactions shows no sign of diminishing, with Isle of Wight Council and Aylesbury Vale Distrct Councils signing off on acquisition strategies.
They are pressing ahead, despite hints from both the Department for Communities and Local Government and CIPFA at Room151’s treasury conference earlier this month, that the mechanism could face some restrictions.
A report to Isle of Wight councillors said: “The council, as encouraged by central government and the Local Government Association, needs to consider alternative and innovative ways in which to increase its income stream and this approach is one of the tools available to us.
“The principle is that the council utilises its borrowing capabilities to purchase investment properties to secure a long-term and reliable income stream for the council.”
The authority said that Portsmouth City Council has agreed to enter into an agreement with it to provide property investment services.
Portsmouth already has a property investment team in place which has delivered a £108m property portfolio for the council, delivering a net profit of £4.3m each year.
The report said: “In order to secure the earliest possible pipeline of income, it is necessary to secure a delivery method that both offers assurance of value for money as well as to commence property acquisition at the earliest opportunity.”
The initial agreement between the two councils would be for 12 months. Isle of Wight officers presented figures showing that the deal would be almost half the price of using a private sector company to provide the same services.
The council said that 70% of the portfolio would consist of prime property, with the remainder made up of higher-risk, higher-return assets.
Meanwhile, Aylesbury Vale has signed off on its own strategy, which will see £100m borrowed from PWLB for capital acquisitions. An additional £100m of revenue funding will be provided from New Homes Bonus receipts.
A report to councillors said: “Property is increasingly proving to be an attractive way to generate income due to the ways that risk can be managed, its long-term nature, and stable cash flow characteristic.
“Council’s ability to access the Public Works Loan Board to borrow capital at favourable rates, additionally provides the opportunity to maximise its return on capital investment.”
The authority is already a 50% owner of Aylesbury Vale Estates which was set up as a joint venture with investor Akeman Asset Management in 2009.
Of this venture, the council report said: “Whilst the recession during that period proved challenging, the value of the portfolio has grown and both the council and the private investor have now received a dividend payment.”