Councils have been warned by the TaxPayers’ Alliance that some investments in commercial property are delivering yields millions below forecasts.
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…these investments [in commercial property] also place taxpayers’ money at a potentially unacceptable level of risk…
The Taxpayers’ Alliance writes:
- From 2016-17 to 2018-19, councils in England spent £6.6 billion on commercial property, 80 per cent of which is accounted for by just 49 local authorities, predominantly in the South East.
- Since 2010-11, the amount spent on commercial properties by councils has increased from £53 million to £2.2 billion in 2018-19.
- On average, only 52 per cent of investments take place within a council’s operational area.
- Council investments in commercial property made up almost a third of all office acquisitions in the South East from 2016-17 to 2018-19…..
Local authority commercial property investments have proven to be successful sources of income for many councils across England. Because councils are forbidden from borrowing to cover running costs, many have used commercial property investments, often funded by debt, to supplement their revenue streams as revenue support grants declined. In the case of some councils, this has even limited the need for council tax rises and allowed them to maintain or even increase services.
However, these investments also place taxpayers’ money at a potentially unacceptable level of risk. Commercial property investments are inherently risky and should returns fall these investments could become a drain on council finances or have to be sold off at a loss. While some councils may maintain the expertise to ensure only sound investments are made, council leaders have expressed concern that this is not the case across the country. Those same councillors also expressed concern that access to loans was, if anything, too straightforward. To mitigate against the likelihood of inexperienced councils making poor investment decisions, the government should increase scrutiny of Public Works Loan Board loans to ensure fewer such decisions are taken. Another way to accomplish this would be by making it a statutory requirement for local authorities to maintain audit committees.
The covid-19 crisis also affects the sustainability of investment strategies significantly. Incomes from both retail and office units (which make up a majority of all council investments) are being especially affected. It is not clear how they will recover in the future. High street retailers were already struggling before the current recession and the ability of many retailers to survive remains in doubt. What is less certain is what effect the widespread embrace of work-from-home measures may have on the future value of office buildings.
Though commercial property investments have generally been considered a stable investment, these factors may prove that conventional wisdom wrong.