Criticism mounts of council ‘carry trade’
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BP campus, Sunbury-on-Thames, bought by Spelthorne Borough Council for £360m. Photo: BP
Local government figures have defended councils against growing criticism in the national press of increasing investment activity in commercial property.
Room151 revealed that councils were on track to spend more than £1bn on buying commercial property in 2016.
Financial commentators in the national press this week voiced concerns about potential problems being stored up for the future.
Financial Times columnist John Plender wrote: “UK local councils are engaging in what is known in the financial jargon familiar to hedge fund managers as a carry trade — a form of arbitrage whereby they borrow at rates much lower than private sector borrowers can obtain in order to invest in property that shows a much higher yield. Money borrowed at 2.5%, or so, is typically going into property yielding 6-8% or more.”
He quoted a number of private sector investors who voiced unhappiness about being outbid for sites.
One fund manager who suffered this fate told Plender: “They are punting like drunken sailors all around the country.”
Lord Oakeshott, chairman of investment firm Olim Property, said that the increased drive for commercial property acquisition is “an accident waiting to happen”.
He told the FT: “There are real echoes here of Northern Rock, where many punters were lent all the purchase price of a property, and the Icelandic bank scandals, where councils played a market they didn’t understand for short-term income gain.”
However, Claire Morris, head of financial services and deputy chief financial officer at Guildford Borough Council, said that local authorities were only following central government guidance.
She said: “The Department for Communities and Local Government issued some guidance a while ago telling you things you could do to balance budgets.
“This included income generation and improving asset portfolios and sweating those assets.
“Councils have limited scope for raising other fees and charges. Many councils are still progressing with efficiency agendas, but sometimes the delivery of savings can’t be delivered quickly enough to balance budgets.”
Councils have had greater freedoms to invest in commercial projects since being granted the power of general competence through the 2011 Localism Act.
At the time he unveiled the measure, former communities secretary Eric Pickles said: “For too long, everything has been controlled from the centre — and look where it’s got us. Central government has kept local government on a tight leash, strangling the life out of councils in the belief that bureaucrats know best.”
But, writing in The Times this week, Ian King, business presenter for Sky News seemed to advocate a reversal in this approach.
He wrote “the sooner they [councils] are subjected to either greater Treasury scrutiny on the one hand or the superior credit checks being promised by the Municipal Bonds Agency on the other, the better”.
Morris said that councils are also being encouraged to drive economic development and that acquisitions of town centre shopping centres and other sites could help drive regeneration.
Rob Whiteman, CIPFA chief executive, said: “As with any commercial activity, assessing the risks will be vital and the more commercial the venture, the more savvy the due diligence needs to be.
“But providing councils are following the rules that dictate making sound and affordable investment decisions, and using specialist internal and external advisers to identify and mitigate any investment risks, these activities bring benefits for councils and taxpayers.
“Whilst overall CIPFA wishes to see greater borrowing freedoms, for example in relation to social housing, we are concerned to ensure that councils do not take higher commercial risk without the necessary improvement in commercial capabilities, enhanced governance and transparency as will be needed.”
Cllr Claire Kober, chair of the Local Government Association’s resources board, said council members and officers were developing new “skills and expertise to take a more commercial approach to investment decisions.”
She added: “All commercial activity involves risk and potential losses as well as the potential to make profits. Local authorities have to adhere to strict rules and assessments before making a decision to ensure it is affordable and provides value for money. The LGA is supporting councils to develop understanding of these risks and opportunities.”
CIPFA is currently reviewing the prudential code to ensure it provides the right balance between flexibility and prudence.
