• Home
  • About
  • Subscribe
  • LATIF
  • Conferences
  • Dashboard
  • Edit My Profile
  • Log In
  • Logout
  • Register
  • Edit this post

Room 151

  • 151 BRIEF

    What's New?

  • Social care workforce crisis ‘requires government intervention’

    August 15, 2022

  • Consultation opens on future of IFRS 9 statutory override

    August 12, 2022

  • EAPF criticised for water company investments

    August 10, 2022

  • Welsh pension fund confirms £50m investment in clean energy

    August 10, 2022

  • Inflation ‘disastrous’ for local services, warns LGA

    August 10, 2022

  • Consultation opens into care charging reforms

    August 9, 2022

  • Treasury
  • Technical
  • Funding
  • Resources
  • LGPS
  • Development
  • 151 News
  • Blogs
    • David Green
    • Agent 151
    • Dan Bates
    • Richard Harbord
    • Stephen Sheen
    • James Bevan
    • Steve Bishop
    • Cllr John Clancy
    • David Crum
    • Graham Liddell
    • Ian O’Donnell
    • Jackie Shute
  • Interviews
  • Briefs

David Green: Consultations risk an Unhappy New Year for treasury managers

0
  • by David Green
  • in Blogs · David Green · Treasury
  • — 20 Dec, 2017

2017 has been a year of preparing for regulatory change. Many of the changes to the global financial system designed to prevent a repeat of the 2008 financial crisis will take effect in 2018, including MiFID 2, Basel 3, IFRS 9 and in the UK, bank ringfencing.

The financial regulators of UK local authorities took rather less than ten years to react to the last crisis. DCLG published its revised Investment Guidance in 2010 and CIPFA followed this up with a new Treasury Management Code in 2011, following recommendations made by the CLG Select Committee in 2009.

Fast forward to 2017 and they are now both trying to prevent what some think could be the next big crisis to hit local authorities — a property bubble.

Location, location, location

There is nothing new of course with councils making property investments; the Local Authorities Property Fund was formed in 1972 to facilitate just that. But the pace of purchases has certainly grown in recent years.

Travelodge wrote to 124 councils in 2013 encouraging them to invest after completing deals in Aylesbury and Eastleigh. When Mansfield got in touch they probably didn’t expect them to buy hotels in Edinburgh and Doncaster.

But if a potential buyer values an asset higher than its current owner, after allowing for transaction costs, then an efficient market will lead to a deal being struck.

The three most important factors when buying property might be location, location and location, but that generally refers to the building itself, not the buyer.

The general power of competence in 2011 also removed questions over the legality of borrowing to invest, always a nebulous concept in any case. With investment properties clearly forming part of an authority’s “underlying need to borrow” in CIPFA’s Prudential Code, and with PWLB lending at interest rates a fraction of the yield available on property, why stop at only investing your own cash? (Hint: search for “leverage” and the name of any failed bank.)

So, there is a worry in some quarters that local authorities are putting their long-term financial viabilities at risk for short-term gain.

Some of the higher profile investors have been quite vocal about their “successes” in commercial property acquisitions, and other authorities are increasingly worried about missing out.

Some council reports explicitly say that “we have to buy because everyone else is!” But those late to join an overcrowded bandwagon are usually the first to fall off when it hits a pothole.

There is also a worry that property investment is being driven by a small number of members and officers, without buy-in from the wider organisation.

And while there are many detailed regulations, guidance and codes of practice on local authorities’ treasury investments, there is currently nothing analogous for property investment.

Requirements and obligations

Most interested parties agree that some new guidance is needed, but CIPFA and DCLG are taking different quite approaches to tackle the issue.

CIPFA is seeking to redress the balance by reducing some of the requirements for treasury investments and adding some for property investments; DCLG is just adding to the list of obligations.

In particular, CIPFA understands that property is a fundamentally different asset class to the cash and bonds typical of treasury portfolios. It will therefore recommend that authorities set out their procedures for assessing risk, making decisions and measuring the performance of property investments and how these differ from the procedures for treasury investments.

DCLG on the other hand has proposed shoehorning property into its mantra of security and liquidity before yield, but with commercial property guaranteed to be valued below its initial cost due to stamp duty, and being the hardest investment to sell in a hurry, this hardly seems appropriate.

CIPFA also realises that long technical reports sent to full council for approval rarely receive the scrutiny that they deserve, and is recommending a short capital strategy report instead, summarising the key issues in a format that maximises accessibility to a mostly non-technical audience.

But DCLG has proposed sending additional technical detail to full council for approval.

I can guarantee that a minority of councillors will read the sections on barriers to entry and exit in financial markets or the training requirements for statutory officers to assess individual assessments. These people quite rightly have other priorities for the time they have volunteered.

Finally, CIPFA has taken a pragmatic approach by deleting some of the prudential indicators that might be sensible in theory but are often erroneously calculated by officers and poorly understood by members.

Few will miss the incremental impact on council tax or the exposure to variable rate borrowing. DCLG though is proposing an additional set of indicators on risk exposures and the funding of investments to enable comparison across authorities.

We can just hope that DCLG has a Merry Christmas considering its consultation responses and adopts an approach more in line with CIPFA’s.

Otherwise 2018 will start with an Unhappy New Year for treasury managers, trying to reconcile two conflicting sets of statutory guidance on investments.

Season’s greetings to you all.

David Green is strategic director at Arlingclose Limited.

Get the Room151 Newsletter

Share

You may also like...

  • A “proper” transitional system could improve funding predicatability 21st Apr, 2021
  • Councils overfunded last year but ‘chronic’ financial pressures remain 20th Jan, 2022
  • Richard Harbord: ‘Effective governance’ the key to commercial activity 17th Aug, 2021
  • Liability benchmark ‘should not be mandatory’ 29th Apr, 2022

Leave a Reply Cancel reply

You must be logged in to post a comment.

  • 151 BRIEFS – WHAT’s NEW?

    • Social care workforce crisis ‘requires government intervention’
    • Consultation opens on future of IFRS 9 statutory override
    • EAPF criticised for water company investments
    • Welsh pension fund confirms £50m investment in clean energy
    • Inflation ‘disastrous’ for local services, warns LGA
  • Room151’s LGPS Roundtables

    Biodiversity
    Valuations & Risk
    LGPS Women

  • Room151’s LGPS Roundtables

    Biodiversity
    LGPS Women
    Valuations & Risk
  • Latest tweets

    Room151 4 days ago

    LATIF/FDs’ Summit ‘on course to be biggest yet’: Room151’s flagship event – the Local Authority Treasurers Investment Forum (LATIF) and FDs’ Summit – is on course to be the biggest yet, with more than 200 delegates expected. Combining[...] dlvr.it/SWSDrL pic.twitter.com/f8FXzcAdWB

    Room151 4 days ago

    ‘Local government treated worse than any other part of public sector’: Clive Betts, chair of the Levelling Up, Housing and Communities Committee, talks to Mike Thatcher about lack of progress on levelling up, pork-barrel politics and why local government… dlvr.it/SWRk1L pic.twitter.com/Jpw0BsOsy3

    Room151 5 days ago

    Which LGPS pools and funds are attending the LGPS Investment Forum on Nov 2 & the LGPS Private Markets Forum on Nov 1st? Answer here: lnkd.in/eDHU8tuy pic.twitter.com/D3gd63Rh7F

    Room151 6 days ago

    LGPS and levelling up: nothing to fear but fear itself: There have been a number of objections to government plans for LGPS funds to invest 5% of their assets in local projects. But George Graham says these objections can be[...] dlvr.it/SWL7vt pic.twitter.com/ebwBEkZTy4

    Room151 6 days ago

    George Graham @SYpensions @bordertocoast channels his inner FDR in a call for local government pension funds to avoid the fear factor and embrace levelling up #LGPS #localgov room151.co.uk/local-governme…

    Room151 1 week ago

    Changes to rules on capital receipts raise wider questions: Stephen Kitching argues that DLUHC’s latest rule changes are part of a series following on from revisions to MRP guidance and the purchase of commercial property. He questions whether… dlvr.it/SWGqKC pic.twitter.com/Ycr5hWZDPk

    Room151 1 week ago

    ‘No ifs, no buts’: the Bank of England continues its battle with inflation: Partner Content: CCLA Investment Management’s Robert Evans discusses the MPC’s 0.5% increase in the Official Bank Rate and its ongoing commitment to the 2% inflation target… dlvr.it/SW7SNC pic.twitter.com/ryOzYRSNA9

    Room151 2 weeks ago

    DLUHC changes rules on flexible use of capital receipts: The levelling up secretary has written to all council leaders to amend the rules concerning the flexible use of capital receipts to fund transformation projects. In his letter, Greg Clark[...] dlvr.it/SW3jyX pic.twitter.com/KEhSSaMITl

    Room151 2 weeks ago

    Local audit and financial reporting: let’s take back control: Mazars’ Suresh Patel suggests three steps that auditors and council finance teams should take to help get financial reporting and local audit back on track. Following my recent appearance… dlvr.it/SW0PfV pic.twitter.com/miL7pjukce

  • Register to become a Room151 user

  • Previous story News Roundup: Settlement leads to ‘grave concerns’, auditing report, LGPS funds buy into Anglian Water, procurement framework saves £88m
  • Next story Peter Worth: Happy New Year – IFRS 9 is coming

© Copyright 2022 Room 151. Typegrid Theme by WPBandit.

0 shares