CIPFA to tighten prudential code as council commercial property investment accelerates
0CIPFA is set to release new guidance before the end of the year, due to the failure of the government’s revised investment code, to curb some instances of councils borrowing to invest in commercial property.
The institute this week released a statement announcing new guidance in response to continued council borrowing from the Public Works Loan Board to fund property investments solely to raise revenue.
Don Peebles, head of CIPFA UK policy & technical, said that the guidance would be likely to formally incorporate text from the commentary which was released alongside the Ministry of Housing, Communities and Local Government’s (MHCLG’s) revised investment code earlier this year.
Peebles told Room151: “The revised code was a clear signal of what the government wanted to achieve. Maybe that signal was not as clear as it could have been.
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“Without pre-empting what we are going to say, we are likely to push the parameters of the code and clarify where local authorities could and should be borrowing to invest.”
Peebles said that the revised investment code’s informal commentary currently cautions against councils becoming too dependent on commercial income, taking out too much debt relative to net service expenditure, and taking on debt to finance commercial investments.
He said: “The local authorities who are approaching the prudential code appropriately in the spirit and the letter of the investment code don’t have to pay too much attention to what we are saying. Most are operating quite appropriately.
“We have to distinguish between those authorities who are taking on debt for regeneration and serving objectives of local authorities, and those who borrow in advance purely to get a return on that investment.
The comments and guidance are likely to be seen as a thinly-veiled warning to councils such as Spelthorne Borough Council, which has borrowed around £1bn from the PWLB to fund commercial property purchases.
Warrington Borough Council has also funded a number of property investments through PWLB borrowing, including £58.7m on two solar farms as reported by Room151 last week.
The council emphasised that the purchase had an environmental purpose – allowing the council to become carbon neutral – as well as a revenue-raising one.
CIPFA’s announcement follows an article in The Economist last week which raised the fear that councils have become “over-exuberant”.
Peebles denied that CIPFA’s latest move was prompted by recent articles in the press, saying that the institute had been working on the issue for some time.
A joint statement from CIPFA chief executive Rob Whiteman and chair of the institute’s treasury and capital management panel Richard Paver, announcing the new guidance, said: “CIPFA shares the concerns raised in relation to the recent continuation and (in a small number of cases) acceleration of the practice of borrowing to invest in commercial property.
“CIPFA will therefore issue more guidance and will make it clear that these investment approaches are not consistent with the requirements of fiscal sustainability, prudence and affordability.”
The news of the revised guidance comes in the week that spending on the acquisition of land and new buildings by English councils jumped to £4bn during 2017/18, up from £2.8bn last year.
Notes accompanying the capital expenditure and receipts final outturn for 2017/18 said: “Expenditure on this category has risen sharply since 2015-16.
“Furthermore, over the last two years increases averaged £1.4bn per year, making it the greatest change in comparison to all other economic categories.
“Increased acquisition of commercial property remains one of the influences behind this increase.”
Paul Dossett, head of local government at audit firm Grant Thornton, said that without the capacity to invest cash profitably in financial instruments, it was no surprise that councils had turned to commercial property.
He said: “In the short to medium term this make sense for individual authorities when compared to returns from bank deposits etc.
“Whether they represent the best long-term options in the market is debatable.
“We all remember when PFI was the ‘only game in town’ and that didn’t end well.”
John Kelly, director of client investments at investment manager CCLA, said that the sharp growth in commercial property investment by local authorities was due to an “increased recognition that property can provide a high and predictable income for long term investors”.
“That said, valuations have risen and the cycle is more mature, so it is important for investors to consider the broader implications of investment, not just yield but the importance of quality and risk control too.”
