Local government spending on commercial land and property continues to attract significant scrutiny, not just from the press and public, but from politicians too.
It is just a few weeks since housing and communities secretary James Brokenshire spoke of his concerns about “the risk that local authorities are exposing themselves and local taxpayers to” through high levels of borrowing. He warned there may be “further interventions” from the Treasury to restrict this activity.
In a separate development, a private members bill by Sir Christopher Chope MP aimed at curbing local authority borrowing for non-core activities is due to get its second reading on 25 January.
There is nothing inherently wrong with public sector investment in commercial land and property, particularly when borrowing conditions are favourable and new revenue streams are sought. But the risks must be understood and carefully managed.
Local authorities buying shopping centres or other commercial assets must be clear on where this activity sits within their risk appetite, and what new risks they could be exposing themselves to, particularly if there is a property market crash. At the same time, councils also need to address the social and ethical question of why they are doing commercial activity in the first place.
For example, local authorities wanting to invest in commercial assets might look to spread some of the financial risk involved by buying up land and property outside their boundaries. But that could create a social and ethical risk if they cannot show a clear benefit to the public they serve.
Often this is a matter of perception. You may be reinvesting commercial profits into important public services, but how can you make that link clear to your community?
If councils aren’t careful, they can quickly lose control of the story around commercial activity. A Financial Times article recently described a local authority that had bought a large commercial site as having become a “property company with a sideline in providing local government services”.
Our message on commercialisation is clear: it is not something that local authorities should fear or shy away from. In the current economic climate, we understand why councils are keen to explore new funding streams. But, it is vital that you clearly understand and can articulate exactly what you are getting into and why.
As long as you are comfortable that the risks you are exposed to suit your appetite, that you have strategies in place to manage those risks through their lifecycle, and that you can show social value, then commercialisation is good.
Alix Bedford, public services segment manager, Zurich Municipal
Column sponsored and supplied by Zurich Municipal