Spelthorne halts commercial property investment
0Spelthorne Borough Council has called time on its controversial programme of borrowing from the Public Works Loan Board (PWLB) to fund commercial property investment.
Over the past three years, the council has become the most high-profile authority to use cheap borrowing from the PWLB to raise revenue for services through property rental returns.
But now it says that it has “achieved our objective of significantly boosting our income to support provision of services”, and will now focus its capital strategy on investment in affordable housing and regeneration.
The capital strategy document, which is going to a meeting of the council’s cabinet next week, said: “The focus of the council was previously to generate revenue in order to safeguard its basic services.
“The focus now is on providing affordable housing.”
The council kicked off its spending spree in 2016, borrowing £377m to pay for the purchase of the BP campus in Sunbury-on-Thames, which falls within its area.
Including that deal, it has since borrowed more than £1bn from the PWLB to fund a series of properties including a £48m office block in Heathrow and a £170m office in Hammersmith, London.
Some of this borrowing went on the fees to complete the deals, and the council says the total value of the commercial property it owns now stands at £933m.
This currently provides a net return of 4.89%, comparable to the rate being achieved by pension funds on commercial assets, it said.
This will provide a contribution towards services of £9.8m in 2019/20, the council said, with the amount set to increase in future years.
“As there is upwards indexation of the rental every five years on most of the assets, over time the yield is likely to rise,” it said.
Without the commercial investments, the council said it would have been forced to cut services, including spending to plug gaps it says are emerging as a result of Surrey County Council cuts to social care services.
“The additional income the council has generated has enabled us to put our revenue budget on a more sustainable footing by ceasing to use reserves to support the revenue budget,” it said.
In the council’s 2016/17 budget it dipped into reserves to the tune of £786,000.
However, Spelthorne’s bold moves in the property market have not gone down well in all quarters.
It is believed that the council was among a small number whose activities were causing concern in central government.
In September 2017, the then Department for Communities and Local Government permanent secretary Melanie Dawes, said councils need to be careful about the risks involved in property acquisition.
In remarks that some saw as a reference to Spelthorne’s BP campus deal, she said: “People are entitled to know that the decisions being made are proportionate to the size of the council, the size of the income flows and the asset base and balance sheet.”
Last month, Dawes told Parliament’s Housing, Communities and Local Government Committee: “There are only one or two councils that we are aware of that are really pushing the envelope beyond the guidance we updated recently with CIPFA.”
However, she refused to confirm that Spelthorne was one of these councils, saying only that the council “certainly has very high borrowing rates”.
CIPFA is currently updating its prudential code due to the failure of the government’s revised investment code, to curb some instances of councils borrowing to invest in commercial property.
In October last year, Don Peebles, head of CIPFA UK policy & technical, told Room151: “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.”
However, in its capital strategy Spelthorne insisted that its investments outside its boundaries had been justified on economic development terms.
It said: “The council considers that defining an economic area restricted to Spelthorne only is to ignore the reality that Heathrow Airport is the real driver of the economy for West London, North Surrey and the Thames Valley.
“We are part of that economic zone and the airport plays an important role in our local economy.”
