“…Councils across England are under huge pressure to adopt a more expansive investment strategy, as their funding from central government is slashed. Many have responded by loading up with debt to play the property market, exposing some to a ticking timebomb of high borrowings and the nascent threat of a property-market collapse.
The omens are not good for retail landlords. Last week the real estate adviser Altus Group forecast that 23,000 shops would close in the UK this year – with a loss of 175,000 jobs – while the Royal Institution of Chartered Surveyors (Rics) told valuers to be “aware of the potential for significant changes in value” in retail properties. Last month fund manager Fidelity International warned that UK retail properties could lose up to 70% in value as a result of rent cuts. The correction would be driven in part by a 10-40% reduction in rents to make them affordable for bricks-and-mortar retailers, Fidelity said.
The Local Government Chronicle (LGC) said the amount spent by councils in England on investment properties ballooned from £76.4m in 2014-15 to £1.8bn in 2017-18. These include offices, hotels, supermarkets and gyms, sometimes miles outside a council’s own area: these out-of-area investments are worth £619m alone.
Lord Oakeshott, chairman of Olim Property, which manages commercial property portfolios for institutional clients, said: “The whole thing is a mess. Councils are being loaned vast amounts of money by government, which is being invested in property. It’s a hell of a gamble that these councils are taking and this is not what councils should be doing.”
If the economy does take a turn for the worse, councils may find their current roster of reliable tenants forced to take evasive action. Store and office closures are a common cure when companies begin to feel the squeeze. A deepening economic crisis and a soaring debt pile makes for a toxic financial cocktail that some “casino councils” may be forced to swallow. Authorities will be forced to find new tenants who might not be able to pay the same levels of rent – if they can find new tenants, that is.
… But with Brexit looming the property sector is particularly vulnerable. The Bank of England has warned that “disorderly” Brexit – where Britain crashes out of the EU without a deal – could make the price of offices, warehouses, shopping centres and hotels drop by as much as 48%– more than the 42% peak-to-trough decline following the 2008 crisis. Even with only a “disruptive” Brexit – where the UK retains access to some trade agreements between the EU and other countries – the Bank suggested property prices could still fall 27%. … “