Councils have been warned not to expose public funds to “unnecessary or unquantified risk” when borrowing to invest in commercial property, amid ongoing concern about the practice.
In a joint statement, Chartered Institute of Public Finance & Accountancy chief executive Rob Whiteman and Richard Paver, chair of the institute’s treasury and capital management panel, reminded councils that the security of funds is the primary policy objective of a local authority’s treasury management investment activities under Cipfa’s Prudential Code for Capital Finance in Local Authorities.
They add both the Cipfa code and statutory guidance issued by the Ministry of Housing, Communities and Local Government are clear that councils “must not borrow more than or in advance of their needs purely in order to profit from the investment of the extra sums borrowed” and investment powers “must be used reasonably and in accordance with an authority’s primary function as a service provider”.
The statement also highlights informal commentary to the statutory guidance which warns councils not to become dependent on commercial income, take out too much debt relative to net service expenditure and take on debt to finance commercial investments.
There is understood to have beeen growing concern in the Treasury about the scale of council borrowing to fund commercial investments.
The statement adds: “Cipfa shares the concerns raised in relation to the recent continuation and (in a small number of cases) acceleration of the practice of borrowing to invest in commercial property.
“Cipfa considers that where the scale of commercial investments including property are not proportionate to the resources of the authority, that this is unlikely to be consistent with the requirements of [the prudential code].”
As a result, Cipfa says it will issue further guidance to clarify that these approaches to investment “are not consistent with the requirements of fiscal sustainability, prudence and affordability”.
An LGC investigation last year found more than a third of councils had invested in commercial property specifically to generate an income since 2010. A third of these owned property outside their area, worth a total of £619m.