Local authority property deals to hit £1bn in 2016
0
BP Campus, Sunbury-on-Thames, bought by Spelthorne District Council. Photo: BP.
Local authorities are on track to complete more than £1bn of commercial property deals by the end of this year, according to new figures.
Room151 has been provided with statistics compiled by property consultancy Savills, showing that £859.1m has been spent by councils on offices, shops, leisure facilities and warehouses so far in 2016.
This is already up almost 500% on the whole year figure of £148.7m figure for 2015, and means that councils accounted for 2.5% of all commercial property deals this year – up from 0.2% in 2015.
Local authorities are piling into the sector in an attempt to promote the economic wellbeing of their areas while generating returns to help compensate for central government grant cuts.
Stuart Cunliffe, head of shopping centre investment at property consultancy BNP Paribas Real Estate, said that low PWLB borrowing was only one factor in the ability of councils to increase their market share.
“The current low cost of finance undoubtedly gives councils some advantage, but it is not as significant as some might imagine. It is the ability to raise 100% finance, so long as the borrowing is prudent, that gives them an advantage,” he said.
“The major REITs (real estate investment trusts) also have a very low cost of capital, but many of these are not investors in some of the smaller, secondary towns and cities but are focussed only on prime retail assets.”
Savills’ figures showed that local authority spending on office schemes is at £505m so far, up 536% on 2015.
Outlay on retail schemes totals £295.2m, up 650% on last year’s £39.1m. Together, offices and retail make up 93% of the total local authority spending on commercial property.
Mat Oakley, head of European commercial research at Savills, said: “There is an argument that the local authority should be investing in its local area in a paternalistic way.
“Arguably shopping centres are fundamentally less risky than offices. If one tenant disappears, then you still have 50 left, whereas you might only have one or two in an office block.”
Spending on leisure schemes has dropped slightly from £4.8m to £4.7m with industrial rising slightly from £25.4m to £31.0m. Acquisitions of mixed use property are valued at £23.2m.
Claire Morris, head of financial services and deputy chief financial officer at Guildford Borough Council, said that the authority has recently added commercial property valued at £50m to its portfolio.
She said: “We have been using internal borrowing. My understanding is that there has to be an economic development justification if you are using PWLB borrowing to do this. But you could argue that investing in shopping centres and helping the high street is a valid economic development reason.”
Last month, Spelthorne District Council purchased the BP campus in Sunbury-on-Thames, using around £370m of borrowing from the PWLB. The council will rent it back to the energy giant.
Roberto Tambini, chief executive of the council, told Room151: “The financial transaction provides us with a surplus but the also enables us to support BP’s services. The company has been here for nearly 100 years and is very important for employment in our borough.”
Cunliffe said that councils are often able to outbid private sector competitors for commercial property assets.
“If the council owns the freehold and the head lease is for sale, that marriage value gives the council a significant advantage. In some cases council’s own the adjoining car park and development land which once again puts it in an advantageous position,” he said.
He said that this position is starting to frustrate some private investors, “none more so than the specialist retail asset managers that, to date, have teamed up with private equity to buy so many centres.”
However, he said that councils are likely to have to spend money hiring the services of these asset managers in future.
“What will happen is that councils will recognise that owning a shopping centre is one thing, but having the skills, time and resources to make the most of it is quite another.”
