It’s four years since West Lancashire Borough Council bought 15 retail units including the Wetherspoons’ Court Leet pub and Greenhalgh’s bakery, all in the Wheatsheaf Walk portfolio. They paid £2.88million at auction. So was it a good investment? Countrywide experience suggests not.
It was, said Cllr Ian Moran, for “Generating additional income and adopting a more commercial approach” and “adding to the existing Commercial Assets Portfolio that provides a significant contribution to the financial sustainability of Council services”. He might need to give council tax payers an update on the value of it now?
WLBC wasn’t alone, but while struggling councils have for years turned to commercial property investment as a source of income, now they face a fall in rent caused by the pandemic. To save money they have already held emergency budget meetings and cut jobs and frontline services or drawn on savings that had been set aside for specific projects.
Council documents show the scale of the rental shortfall and valuation declines. Shropshire council, which bought three shopping centres in Shrewsbury for £51 million in 2018, has cut its rental income forecast for the coming financial year by £578,000.
Canterbury council, which owns the Whitefriars shopping centre in the city, has warned of a £2.2 million shortfall this year as some tenants are expected to go into administration. Stockport council has seen the value of its Merseyway shopping centre decline by more than 60 per cent to £34 million since it was acquired in 2016. The shortfalls were first reported by React News, a property website.
The spending spree can be traced back to 2004 when the government introduced a prudential framework for capital investment. It gave councils the power to determine within their area how much they borrowed and what they wanted to spend money on.
Five years later came the financial crisis and the introduction of austerity, which resulted in a reduction in funding from central government.
Councils started to seek alternative sources of income and have increasingly become players in the property market, using their borrowing powers to invest both for regeneration purposes and to provide revenue to fund services.
Authorities have borrowed an estimated £6 billion over the past three years to invest £6.6 billion in commercial property including office blocks, shopping centres and warehouses. Underlining the scale of councillors’ ambitions, almost 40 per cent of the investments made in those years were for assets outside their areas, according to the National Audit Office.
Spelthorne council in Surrey bought 12 Hammersmith Grove, an office block in London for £170 million. Spelthorne is said to have authorised Wework, the serviced office company which is a tenant at the building, to defer its rent for 18 months, resulting in a £4.5 million short-term loss to the council. And counting?
Almost half of retail premises have been subject to rent concessions, holidays or renegotiations since lockdown, says Remit Consulting. The Treasury is planning to crack down on councils making commercial property investments. A consultation, due to end this month, proposes preventing them using government loans from the Public Works Loan Board (PWLB) to buy commercial assets primarily to create a revenue stream. Protections have been designed to ensure councils can still invest for regeneration purposes.
The Chartered Institute of Public Finance and Accountancy is reviewing the prudential code to try and further discourage councils from making risky investments.
Joe Anderson, Mayor of Liverpool, says the introduction of restrictions would be “rubbish”. Under his Invest to Earn strategy, the city council has bought properties including the Cunard Building, and Liverpool Central shopping centre to generate income, as well as support regeneration. “The Treasury wouldn’t dare do that. Do you know why? Because this country needs to grow itself out of the mess that it’s in and the Covid crisis as well”.
Well, he should know?