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Internet shopping's rise piles the risk on retail

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In 2016, councils spent almost £387m purchasing shopping centres, according to analysis by real estate advisors Savills. These transactions accounted for 13% of all UK shopping centre deals and 44% of all deals below £100m, suggesting councils are often investing in retail premises in smaller towns and cities.

Though a thriving town centre has traditionally been vital to a healthy local economy, with retail as a sector undergoing profound change due to the growth of internet shopping, there are serious questions over whether this makes for a sound investment.

LGC’s research found shopping centres or retail premises often accounted for a significant proportion of a council’s investment property portfolio. Overall, 52 of the 265 councils that responded to our freedom of information request said a shopping centre or retail premises was their largest property. In 14% of councils this accounted for more than half of their total investment property.

Often councils will have acquired ownership of these premises prior to 2010. However LGC’s research identified a number which had made more recent purchases.

East Northamptonshire BC spent £3.9m on a retail site in Rushden town centre earlier this year that is currently home to a Wilko and an Iceland. It is the council’s only property purchase since 2010 specifically to generate an income and is part of a strategy to operate more commercially.

Chorley BC bought the 34-unit Market Walk shopping centre in November 2013 for £23m. However, the latest figures provided to LGC by the council show it is now valued at less than £21m.

In a statement Chorley leader Alistair Bradley (Lab) said the drop in valuation was mainly due to “national influences such as uncertainties around Brexit” but the council viewed Market Walk as a “long-term asset and a means to shape, influence and strengthen Chorley town centre going forward”.

Other recent high profile examples include Surrey Heath BC’s £94m purchase of The Strand shopping centre in Camberley, Walsall MBC’s £13m purchase of the town’s Saddlers shopping centre and Sefton MBC’s purchase of The Strand shopping centre in Bootle for a reported £32.5m.

All the purchases are intended to support the councils’ regeneration plans as well as return an income.

Nigel Wilcock, executive director of the Institute of Economic Development which represents professionals working in the field, told LGC he could understand the “thinking” of councils taking this approach but warned many of the properties were “probably not blue chip assets”.

“When the market turns against you, where do your objectives lie? Is your objective principally to support the local high street or SME community, or is it to make commercial returns? It’s a pretty tough call for councillors when you’ve got to pick one or the other,” he said.

Some councils are taking a more hard-headed approach from the outset. Mansfield DC owns the town’s shopping centre but of the £24m of income generating property it has purchased since 2010 just £3m of that was spent on retail with the purchase of a Volkswagen car showroom in Glasgow. The council’s director of commerce and corporate services Mick Andrews told LGC the council had not ruled out retail but it had to be in ”really strong area”. 

Gareth Davies, head of public service at Mazars, told LGC risk assessments of retail properties needed to particularly good. “Shops are closing particularly under pressure from internet shopping so what kind of retail is this? With Amazon moving into the grocery market, are supermarkets as safe as they look? What does the council know that the private sector doesn’t?”

However, Ed Cooke, chief executive of Revo, formerly the British Council of Shopping Centres, told LGC councils’ ability to borrow cheaply and over long periods of time meant they often had a “different risk profile from the private equity vehicles they might be buying from”.

“So long as proper due diligence is done and the council has the right resources and capability in place [to manage the asset], and those are two fairly big ifs, then retail can certainly be an asset worth investing in,” he said.

He said there had been a definite “shift” in the market with the private sector increasingly working with council owners to provide the expertise in managing retail premises that councils did not have in-house, rather than owning the premises themselves. In Sefton for example the council is working with the asset manager that the centre was purchased from.

If the private sector is admitting defeat in some places, then questions must be asked about the level of risk councils are taking on when investing in retail premises outide of major centres. However, their cheaper finance and ability to live with lower level rents, particualrly if they can generate returns through business rates and local economic activity more generally, puts councils in a significantly different position. As our town centres undergo a period of profound change in many ways it seems only right that local government has its hands on the levers to shape that. 

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