Councils have been borrowing money from the government-funded Public Works Loan Board (PWLB) at low rates and then investing it in commercial property ventures for higher returns.
In response to a Freedom of Information request by Local Government Chronicle (LGC), 94 councils said they had bought property since 2010 purely to generate income, and 37% of these admitted they had invested outside of their area.
Around 20% of the 94 councils said the property they owned outside the area amounted to £10m or more, although several of these said it was “part of the council’s historic investment property portfolio”, not new investment.
For example, Surrey County Council has spent £186m, which is 78% of its total investment properties, on property outside its area, and Mole Valley put £10.8m into an Asda that was almost 200 miles away.
Bridging the gap
After a 37% cut in funding to local authorities between 2010 and 2015, councils have been trying to make up the shortfall in a variety of different ways. Southampton City Council’s head of capital assets Mark Bradbury supports the outside investment.
“If a business goes bust [in your area] it’s not just the rent that you lose, it’s the council tax, business rates, the disposable income of people who worked there. Investing beyond your boundaries is an obvious thing to do as part of a balanced portfolio.”
But many warn there are inherent dangers in the strategy. Liberal Democrat leader Vince Cable has said that the fact councils are investing in commercial property in other parts of the country is “shocking”.
“Local authorities have a long and inglorious history of gambling in financial and property markets,” he said, referring to the 1980s when a number of councils got into financial trouble after betting on interest rates.
He added: “When they are massively constrained in what they can do around council tax – and indeed commercial rates – they are trying to prevent even deeper and more damaging cuts by taking these unorthodox measures. In some cases they may succeed, but there is a very high risk of bankrupting their local authorities. It does suggest a certain degree of desperation.”
