MPs investigate commercial property purchases by councils

Parliament’s spending watchdog has launched an inquiry into purchases of commercial property by local authorities, amid fears that the coronavirus pandemic will expose councils to a drop in income from their investments.

Owl is particularly interested.

Joanna Partridge  www.theguardian.com 

The public accounts committee will look into whether local government officials have the commercial skills required for such transactions, which have rocketed over the past four years. MPs will also question officials from the Ministry of Housing, Communities and Local Government over how much they monitor commercial activity among local authorities and their exposure to risk.

Local authorities have been on a shopping spree in recent years, buying up property such as shopping centres and office buildings as a means of increasing their revenues and to offset the impact of austerity measures introduced in 2010.

A recent report from the National Audit Office (NAO), which scrutinises government spending, found that local authorities spent an estimated £6.6bn on commercial property from 2016-17 to 2018-19, compared with £460m during the preceding three years.

The pandemic is expected to create a hole in councils’ budgets due to a huge shortfall in council tax income, along with lost revenues from missed parking and leisure fees during the coronavirus lockdown.

Ministers are expected to provide English councils with a £1bn bailout to prevent several of them from collapsing into insolvency due to soaring costs related to the coronavirus crisis, such as for providing extra social care and housing rough sleepers during the lockdown.

Even before the government lockdown created uncertainty about local authorities’ income, the NAO report warned of the risks associated with commercial property, which could leave councils badly exposed by a recession or property crash.

“Income from commercial property is uncertain over the long term and authorities may be taking on high levels of long-term debt with associated debt costs,” the NAO said.

Councils have been able to access low-cost funding from the government’s public works board, but critics argue it has caused them to bid higher amounts for property, and in some cases overpay.

Spelthorne council in Surrey, a tiny Conservative-controlled authority, has used these Treasury-backed loans to build a £1bn property portfolio, despite its annual operating budget of £22m. The council said last year that income from commercial property allowed it to offset £2.5m of government grants cuts, and raised more income than council tax.

Shropshire council has previously been criticised for spending £51m on three shopping centres in Shrewsbury, all of which had fallen in value by almost a quarter even before the pandemic.

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However, the council countered that the fall in value was not a major concern and the assets would guarantee some annual income and enable redevelopment, to make Shrewsbury town centre more attractive.

A spokesperson for the Local Government Association, which represents English and Welsh councils, said: “Councils have faced a choice of either accepting funding reductions and cutting services – such as care for older and disabled people, protecting children, reducing homelessness, fixing roads and collecting bins – or making investments to try and protect them.”

Fears over council’s property investments are being replicated across the continent. The latest analysis from the real estate consultancy Green Street Advisors says that commercial property across Europe will “experience occupancy declines and rent declines in 2020 and 2021”.

 

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