Leicester adds direct property investment to new treasury management strategy
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Photo (cropped): zaphad, Flick.
Leicester City Council is to use £10m of its accumulated minimum revenue provision (MRP) for direct investment in commercial property.
The council, which approved its 2017/18 treasury strategy this week, has given itself room to use the cash to buy properties in an attempt to beat the returns offered by banks.
The strategy will also involve selling under-achieving assets already owned by the council, with the proceeds reinvested in better quality buildings.
Mark Noble, head of finance at the authority, told Room151: “Any money advanced will be from our existing cash balances, which range from £160m to £230m at any given time, and are currently essentially held with banks or lent to other public sector bodies as part of our treasury strategy.”
Noble emphasised that the council, unlike many others around the country, will not borrow in order to make the property acquisitions.
He said: “The cash is essentially available because, like many authorities, we are unable to use accumulated MRP to repay debt due to punitive premium rates. The rates we are achieving on invested cash are minimal.”
Property purchases will be targeted in Leicester and the surrounding area, Noble added, with potential regeneration benefits.
Criteria for acquisitions will include the expected return, security of income, the potential for capital appreciation, and the fit with the council’s target portfolio.
Noble added that the council will continue to make sales of under-achieving assets it holds, with proceeds reinvested in better quality property.
The £10m allocation is part of a wider £65m property investment strategy, which also includes a maximum of £15m which can be invested in investment manager CCLA’s Local Authority Property Fund.
Commenting on the strategy, John Kelly, client director at CCLA, said: “CCLA supports spreading the portfolio — cash rates will stay low and are a poor match to rising inflation.
“Sensible investment can be a substantial benefit to local authorities. However, after very strong returns from the sector in recent years the property cycle is maturing, which means that the potential for capital growth has reduced and that risks are edging higher.
“For CCLA this means broad diversification at the regional, sector and asset level.
“Also a focus on quality assets where active management can provide returns better than those from the sector as a whole.”
Another strand of Leicester’s drive will allow £20m to be invested in “new opportunities”.
Noble said: “Unlike the investment property proposal, it is proposed that the council’s investment will also be expected to secure economic development benefit for the city.
“Apart from commercial property, where there is a long tradition, we would not want to invest in local economic projects for no reason other than a financial return.”
He admitted there could be some overlap with the £10m commercial property investment strand, but said that “the focus here is more on responding to opportunities where we can get involved for a return, rather than the much more managed process envisaged by the local investment fund”.
A final £20m has been earmarked for the council’s existing The Leicester City Investment Fund, designed to encourage business growth, job creation, development and regeneration in the Leicester area.
Loans of between £500,000 and £4m are available to eligible companies, and an investment of the latter amount has been agreed to create new office space which will be leased to Hastings Insurance.
