Councils play down fears on commercial property overbidding
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Claims that councils are overbidding for commercial property are wide of the mark, according to speakers at Room151’s Local Authority Treasurers Investment Forum (LATIF).
Increased spending from councils has led to grumbles from some private sector investors that they are unable to compete with the prices paid by local authorities, who are able to borrow at cheaper rates from the Public Works Loan Board.
But such worries were played down by a number of speakers at LATIF, held at the London Stock Exchange last week.
Michael Quicke, chief executive of investment manager CCLA, told delegates: “We don’t see evidence of local authorities consistently overpaying for assets – sometimes they pay more and sometimes they pay less. “We don’t see any alarming behaviour going on out there when we are in the market.”
Paul Deal, corporate financial adviser at Mendip District Council, said that councils are taking measures to ensure that they don’t go above a reasonable market rate for investment properties.
He said: “If you have appropriate support and advice then you go into the bidding process with a price ceiling and know not go above it.”
Deal added that when his council is interested in purchasing a property outside its own area it first ensures that the local authority is not interested, in order to avoid a bidding war.
Danny Mather, corporate finance manager at Warrington Borough Council, said that due diligence processes meant that councils were taking fully-informed decisions about the risks involved in their commercial property transactions.
He said: “Property is like any other investment. You have to do a risk assessment. We have things professionally valued and only bid up to a limit that we set at the beginning of the process.”
Also speaking at the event, Victoria Worsfold, principal accountant and deputy chief finance officer at Guildford Borough Council, said that her council always examines the creditworthiness of building tenants before completing deals.
She said: “We haven’t done many because we have got a good, robust process and they are often not viable.”
However, Innes Edwards, treasury manager at Edinburgh City Council, said that there were inherent problems in councils’ current trend of borrowing cheap to invest in property.
He said: “It hugely concerns me that councils are overbidding for these properties compared to investment funds.
“The reality is that when you borrow to invest it always ends in tears.
“People weren’t throwing themselves out of windows because they lost money on the stock market. They were throwing themselves out of windows because they borrowed money and lost it on the stock exchange.”
Room151’s 2018 Treasury Investment Survey found that only a quarter of councils say that they have no direct investments in commercial property and are unlikely to make any. 12.6% of respondents said they are likely to enter the market in due course, with a further 22.38% saying they would begin to invest in residential property investment market, joining the 33% of councils that said they already do.
Speaking during a separate session, Quicke said that council property portfolios are “skewed” towards two particular areas.
He said: “One is in shopping centres, where in the second quarter of 2018 local authorities acquired 50% of the shopping centres that were for sale.”
The second area is south eastern offices where in the second quarter local authorities were 30% of the market.
“You can see if they are 3.5% of the whole and 50% or 30% of those particular sectors then what is not happening is the creation of a balanced property portfolio.”
