Council tax to rise as coronavirus hits town hall investments

“Families face higher tax bills and reduced public services as councils’ multibillion-pound investments in commercial property sour in the coronavirus lockdown.”

How many times in the past have we heard stories of unwise council investments? And still they do it.

It is, of course, partly a consequence of inadequate central funding, though some councils seems to be all to ready to play the role of entrepreneur. The money being risked is public money.

Andrew Ellson, Consumer Affairs Correspondent | Gareth Davies
Local authorities have borrowed £6.6 billion since 2016 to buy shopping centres and office blocks to replace revenue lost by government cuts.

One council bought a shopping centre for £40 million weeks before lockdown in which more than 90 per cent of the stores are now shut. Another council paid £6.2 million for a hotel that the tenant has said will go bust without a rent cut of up to 80 per cent.

The British Property Federation says that only two thirds of office rents and one third of retail rents were paid on time in March. It expects those figures to halve again in June.

Property groups are finding it difficult to sell retail parks at any price, and analysts predict lower office rents for years as more people work from home.

Analysis by the Bureau of Investigative Journalism has found that dozens of councils are reliant on income from investments to fund public services.

One in eight pounds spent by Woking council, for example, is paid for by investment and rental income. In a recent report the council said reserves were in place to cope with temporary falls in rent but admitted that if there were a permanent reduction, “service provision would need to be reviewed”.

Spelthorne council also has huge exposure to commercial property, having spent £1 billion on offices and shops in the past five years, including buying Elmsleigh shopping centre in Staines for £40 million 12 weeks ago.

Almost £10 million of Spelthorne’s annual spending on services is funded by these investments — more than by council tax, business rates and government grants.

Lord Oakeshott of Seagrove Bay, of Olim Property, the commercial property manager, said: “Professional investors have been warning these council amateurs for years about their wild property gambling spree. Councils have splashed billions of taxpayers’ cash but now they’d be lucky to get half their rents paid or half their money back if they sold. The Treasury must wake up and stop this scandalous waste of public money.”

Demand for local authority services has risen in the pandemic but income from council tax and other services, such as parking, has fallen. Ministers have agreed to provide £3.2 billion to meet the extra costs but this week a group of MPs told the chancellor that the funding gap was four times greater.

This week Rob Whiteman, head of the Chartered Institute of Public Finance and Accountancy, told MPs he was “quite worried” about councils “overexposed” to property. He said that Spelthorne had “borrowed too much”.

Once interest and maintenance costs had been taken into account, Spelthorne’s £1 billion portfolio generates a return of less than 1 per cent for services. Mr Whiteman told MPs: “You don’t have to be accountant of the year to know that’s quite a lot of risk.”

Spelthorne said that it had built up a £20 million fund that would protect against the financial impact of lockdown and was confident there would be no impact on services. It admitted to collecting only 30 per cent of the rent due on Elmsleigh shopping centre but said that the purchase was a regeneration project and not to fund services.

The council said it was very confident in its approach to investing, adding: “Investment in frontline services made possible in recent years by our commercial income has enabled the council to respond more effectively to support its residents during this crisis.”

Woking council said: “It is too early to tell what the long-term impact of Covid-19 will be on the national and local economy and right now our focus is on supporting businesses to safeguard local jobs and services beyond the current crisis.”

The big spenders

● Warrington council Eighteen months ago, Warrington paid £26 million for Eddie Stobart’s distribution HQ. Within a year, its chief executive stood down after an accounting error overstated profits. In February, the company announced a loss of £200 million.

● Surrey Heath council In 2016, the council paid £86 million for a shopping centre in Camberley. The anchor tenant, House of Fraser, said it was closing 18 months later, forcing the council to cut the rent.

● Northumberland council In 2016, Arch development, owned by the council, paid £78 million for a shopping centre in Cramlington. Two years later Arch was dissolved amid claims of mismanagement. Ownership was transferred to a new council-owned company.

● Norwich council In November, Norwich bought the site of a Travelodge in Essex for £6.2 million. The hotel chain has asked for rent cuts to avoid administration.

● Stockport council In 2016 the council bought Merseyway shopping centre for £75 million even though it had been in receivership for seven years.