The trend of councils investing in commercial property originally stemmed from their desire to fund regeneration schemes and gain control over local assets to assist in the regeneration process. This has particularly focused on secondary town centres and those with obsolete high street offices or tertiary retail.
However, the motivation has increasingly switched to providing income for local services against a backdrop of reduced funding from central Government. Indeed, the Local Government Association estimates that councils have faced a reduction of nearly £15 billion in central government funding over the last decade.
Where investment has been solely for income, purchases have not been restricted to properties within the local authority’s boundary, and ‘off patch’ investments have become an increasing trend. For example, the National Audit Offices estimates that 47.9% of all acquisitions by value in 2018/19 were outside the boundary.
Councils have purchased a significant amount of commercial property over the last four years, totalling over £7 billion. Investment peaked in 2018 at more than £2.2 billion. Although investment levels have reduced over the last year, Q1 2020 still saw purchases totalling £325 million. The highest proportion of investment since 2016 has been in office property, accounting for 44% of the total, with retail accounting for 31%. Industrial accounted for 14%, with the remainder in mixed-use or other sectors.
The volume of property bought by local authorities has been buoyed by their ability to outbid other purchasers. This is primarily because they can access cheap government borrowing through the Public Works Loan Board (PWLB), with the rate for 50-year new maturity loans at just 1.81% until October 2019.
The Government has become increasingly concerned about the level of investment and potential for excessive risks to be taken. In its February 2020 report “Local authority investment in commercial property”, the National Audit Office highlighted a risk that some local authorities could have paid a premium above the market rate due to the low rate of borrowing available through the PWLB.
In October 2019 the Treasury responded to the increased level of PWLB borrowing to fund commercial property investments by raising the borrowing rates for PWLB 50-year new maturity loans by 100bp to 2.82%.