Editor’s Blog: Commercial property investment now a bad publicity risk

Suddenly everyone is talking about local government’s involvement in commercial property investment. And it doesn’t make for easy reading.

Over the past two weeks investment by local authorities in shopping centres, department stores and office blocks has moved from the agendas of council finance chiefs onto the pages of national newspapers with shrill headlines.

The Financial Times ran articles with headlines crying: “Councils build a credit bubble” and “Local councils are set to lose the property game”. Meanwhile, in The Times, Sky business presenter Ian King wrote a piece headed “Revolution in council lending could tackle irresponsible borrowing”; a direct claim that councils were courting disaster by borrowing at cheap PWLB rates to fund property acquisitions.

Without exception these articles offered stark warnings that local government was risking financial catastrophe by investing in a market they couldn’t possibly understand and were overpaying for the privilege. They were  involved in a “carry trade”, their actions “an accident waiting to happen” and a “slow motion train wreck”. The investment risk was compared to that of Northern Rock, money placed in Icelandic banks and the debacle Orange County found itself in when the US local authority lost $1.6bn on derivatives.

The articles quote learned private sectors sources, and few, if any, from local government. Without exception all cited Spelthorne District Council’s acquisition of BP’s Sunbury on Thames office site for £360m — using PWLB funds— as a clear example of financial folly; though this huge deal is clearly an outlier when compared to others.

Then on Sunday the Observer reported former Lib Dem business secretary Vince Cable warning that council investment in property was “not wise or sensible”. He said: “Local authorities have a long and inglorious history of gambling in financial and property markets.”

The warnings are stark. But more importantly, Cable’s intervention saw the issue move from a niche concern of local government and property developers to the national political arena.

Which local authority would now risk a Spelthorne-sized investment, or even a much more modest property deal, knowing that national newspapers and politicians are waiting to report the horrific risks they are taking with public money? Few, it’s safe to say, the warnings are loud and clear, and very public.

We know this is the case because once TV documentaries began warning about the dire consequences of investing in LOBO loans — prompting an inconclusive inquiry by a House of Commons committee — behaviour changed. Newham council, forced to defend its actions, recently reached agreement with Barclays to move many of its LOBOs into fixed rate loans, promising a saving of £94m. Barclays has also revealed it will no longer offer LOBOs.

Nothing disastrous had happened with LOBOs. But ardent critics have cast doubt on their ability to offer value for money. The warnings and bad publicity reached such a pitch Newham councillors and officers could no longer tolerate.

LOBOs demonstrate that bad publicity is a risk that has to be taken into account when considering where to invest public money. And for property investment, the bad publicity involves no actual outcomes, no financial catastrophe or lost millions in public money.The reputational dangers come merely from warnings.

Of course, publicity risk may be entirely divorced from the underlying fundamentals, but it is a risk nevertheless and one that officers and politicians alike will now be pushing up the list of priorities. Indeed, it is likely to be a key determinant when councillors sit down with 151 officers and treasury managers to discuss potential property deals. Property opportunities will come along, but first thoughts now will turn to the potential headlines they will generate. They sometimes say no press is bad press. That’s not necessarily the case when it comes to local government finance.

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