Proposed government guidelines on council borrowing will make it near impossible for authorities to borrow to invest in income generating property investments outside of their area, LGC has been told.
Controversy over councils increasing investment in property, much of it funded through borrowing from the Public Works Loan Board, has been raging this year with widespread speculation the chancellor is preparing to tighten up borrowing rules in Wednesday’s Budget.
Late last week the Department for Communities & Local Government published a consultation proposing revisions to the Local Authority Investment Code which, if adopted, would ban councils borrowing solely to generate a rental income.
The draft guidance stipulates that “borrowing solely to invest in a yield bearing opportunity is borrowing in advance of need”. The practice of borrowing in advance of need is already banned under local government finance regulations.
Sean Nolan, the Chartered Institute of Public Finance & Accountancy’s director of local government, told LGC the stipulation that this kind of borrowing would in future count as ‘borrowing in advance of need’ effectively prohibited such arrangements.
Mr Nolan said: “The impact of this prohibition will be felt much more by councils buying property outside of their area.
“If you’re able to point to other objectives, like local economic regeneration or service benefits, that’s clearly more than just solely for yield but out of area it’s going to be much harder to argue that.”
Last month LGC research revealed 94 councils had invested at least £2.4bn in property specifically to generate an income since 2010. The research found these authorities owned £619m of property outside their area, although not all of this had been purchased since 2010.
Surrey CC has spent £186m outside of its area since the turn of the decade, accounting for 78% of its investment properties. Meanwhile, Surrey district Mole Valley DC spent £11m on an Asda store 200 miles away that is expected to provide £600,000 a year in rental income.
The new rule would not prevent councils from investing their own cash or capital receipts in income-generating property and there may be instances where a council could demonstrate an additional justification for an out of area purchase, for example if it was still within its travel to work area.
However, it could derail some councils’ investment plans.
Mansfield DC has invested almost £24m outside of its area since 2010, funded through a mixture of borrowing and receipts, in order to replace funding lost as a result of cuts to central government funding. The council plans to invest £55m in income generating property over the next three years, funded entirely out of borrowing.
Speaking to LGC last month director of commerce and corporate services Mick Andrews said the high-yield investments required to support this strategy were not available in Mansfield.
He said: “If [the ability to borrow to buy these properties] is going to be taken away or restricted what does the DCLG propose to put in its place? We will end up making big reductions to services.”
A spokesperson for the Local Government Association said any “moves to restrict” councils’ “prudent investments would be “unnecessary and unwelcome”.
They added: “Councils have been encouraged to find ways of protecting services by generating income from alternative sources to replace lost central government funding.”
In the introduction to the consultation, the DCLG says the guidance requires updating to reflect changes in the “economic and regulatory” environment over the past seven years, including the introduction of the ‘general power of competence’ in the 2011 Localism Act which gave councils much greater freedom over the kinds of activities they could engage in.
It says the government “does not want to discourage local authorities from investing to deliver local economic regeneration” but councils “need to be better at explaining ‘why’ not just ‘what’ they are doing with their investment activity.”
It adds: “At the same time local authorities need to remember that their prime duty is to deliver statutory services for local residents and they have stewardship of public funds to do so.”
Other proposed changes to the guidance include requiring councils to publish the contribution income-generating investments make to the delivery of their “core functions” and to demonstrate that officers and councillors involved in such investment decisions have the skills and capacity to do so.
Mr Nolan said most other elements of the guidance reflected proposals also in Cipfa’s revised and strengthened Prudential Code around improved training, scrutiny, transparency and use of expert advice.
The consultation runs until 22 December.