Councils are set to plough on with direct investments in commercial property, such as offices and shopping centres, despite warnings.
A survey of council treasurers by Room151 has revealed almost 60% of the 120 councils polled will increase their direct investments in commercial property either “somewhat” or “significantly” in the coming year.
The poll results follow recent reports in the national press that increased PWLB borrowing to fund commercial property investment may prompt government intervention.
The Room151 survey found that of those councils that expect to “significantly increase” investment, 80% will do so to generate revenues. Among those authorities preparing to “somewhat” increase their spending on property, revenue generation is the prime reason for 70%.
The research also found close to half of all councils (42%) surveyed have made direct investment in commercial property in the last year. At Room151’s annual conference next week a panel of council CFOs will discuss property investments both as a plug for funding cuts but also as a means of regenerating areas the private sector has failed to deliver in.
In July Room151 reported a warning from Mike Britch, group managing director of the NPS Group — wholly owned by Norfolk County Council — that central government could take action to stop the investment. Speaking at the CIPFA annual conference, he said he was “not convinced that some of the decision making has been taken with the best advice possible.”
His comments came in the same week The Times reported that local government has spent £2.7bn on commercial property since 2015. Figures released in August by the government showed council investment for the quarter April to June this year had risen 60% on the same quarter last year.
That rise in investment has come in parallel with an increase in the loans taken from the PWLB. The body’s annual report last month revealed that council borrowing rose from £3bn in 2015-16 to £3.6bn in 2016-17.
Kingston council recently borrowed £40m to spend on acquiring an office and retail complex in the town while Gloucester council has created a property investment fund of £80m entirely with PWLB loans.
Despite low rates, alarm has been expressed at the extent to which councils have been buying property and have been accused of creating a “credit bubble” and “an accident waiting to happen”.
In June last year the National Audit Office warned that the debt being taken on by councils to back capital spending could threaten revenue spending.
A report from Moody’s, the ratings agency, also revealed concern. It said: “Borrowing to invest in commercial projects exposes local authorities to additional credit risk as the revenues that flow from these projects are inherently uncertain.
“Those adopting this strategy also face increased project execution risk and greater competition from the private sector.”
The full results of Room151’s Annual Investment Survey will be made available to participating councils in the coming weeks.