Councils bet billions on property purchases

Britain’s councils are making multi-billion-pound bets on commercial property as they try to replace revenue lost through government cuts, an investigation by The Times has found. Local authorities are taking out loans to buy shop premises, offices and business parks despite having little or no investment experience, raising concerns that services will have to be reduced if the property bubble bursts. Councils have paid £2.7 billion for commercial properties since 2015, up from £500 million over the previous three years, freedom of information requests show. Experts warn that some are building “exceptionally risky” portfolios. Spelthorne district council, a small authority in Surrey, has invested £422 million this year, or £10,600 for each household in its borough. Local authorities now account for up to a third of buyers in some areas, inflating prices. If rents collapse, councils face the prospect of debts that they can afford to repay only by cutting services or raising taxes. The Royal Institute of Chartered Surveyors has warned that demand for retail space is falling and rents stagnating as con- sumers curb spending or shop online. Lord Oakeshott of Seagrove Bay, co-founder of the investment manager Olim Property, said: “Councils might as well be buying shares with public money or betting on the 2.30 at Ascot. It’s totally inappropriate and building up risks for the future. This is a short-term effort to shore up services but when it goes wrong those services will have to be slashed harder and taxes put up more.” Meg Hillier, the Labour MP who chaired the public accounts committee in the last parliament, said: “The danger is a repeat of the Icelandic banking collapse, when councils were overexposed to one market. A crash in the value of offices or shopping centres could have a very big impact, with councils suddenly owning a lot of white elephants.”

The Times made more than 350 freedom of information requests to every local authority in Britain and found that almost half have made at least one commercial property purchase since 2012. One in five has spent more than £10 million and eleven have spent more than £50 million. Some have invested tens of millions of pounds in shopping centres despite concerns that the internet is hurting bricks-and-mortar retailers. “The big estate agents can’t believe their luck,” Lord Oakeshott said. “In a difficult market they are rubbing their hands in glee at this fees bonanza.” Ms Hillier said: “You have to question whether councils are getting a good deal. We have seen this before with free schools — as soon as there is interest in sites, prices go up.” Many councils are borrowing from the Public Works Loan Board, a Treasury agency, to fund purchases. These loans are attractive because they cost less in interest than the income councils receive in rents. Spelthorne council has borrowed £377.5 million over 50 years at up to 2.08 per cent to buy a BP research complex in Sunbury. The council expects to generate £3 million profit a year. However, BP, which is still recovering from the Deep Water Horizon oil spill, has committed to the site for only 20 years. The public accounts committee warned last year that councils lacked the talent needed for such investments. Its report said: “The market value of the commercial skills and experience required is not a good fit with local- authority pay scales.” The committee added: “We are concerned the Department for Communities and Local Government [DCLG] appears complacent about the risks.” The Treasury does not record the reasons for loans. The Times has passed its findings to both departments. The Local Government Association said that councils followed strict rules before making investments. A spokesman said: “In many cases, councils have not only been making investment decisions that can help them replace funding shortfalls, but also contribute to their local economy and environment.” Spelthorne council said that property experts advised on the BP site to ensure it “understood fully” the risks. The DCLG insisted that there were “strong checks and balances” to protect taxpayers’ money and that it “actively monitors” transactions, although it declined to give details of how.