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Ian Miller: Councils can balance transparency, risk and returns

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If the guest briefing from Gareth Davies of the Bureau of Investigative Journalism was designed to provoke a defence of what most councils are doing on commercial property investments, it has succeeded.

The briefing shared unfortunate traits with some national newspapers, calling into question one of the things that the Localism Act 2011 delivered: a power for English councils to be able to do what individuals generally may do. Companies and individuals can borrow money to buy properties to produce a net return, so why shouldn’t councils?

When anyone can borrow five times their salary to buy a house, it should be well within councils’ ability to borrow an equivalent multiple to fund capital purchases. It involves public money rather than private but with appropriate safeguards and procedures risk can be mitigated by carefully reviewing the business case for each investment and implementing appropriate policies and processes.

An example is developing a mixed portfolio. It would be senseless to buy all the same things in the same place, just as a stock market investor would be unwise to buy shares in similar companies operating in the same geography.

Local government is the most transparent part of the public sector, taking decisions in public except on matters rightly protected from disclosure. Homes England’s board doesn’t meet in public when deciding on investments, and we are all familiar with the secrecy at the heart of the cabinet and its sub-committees.

It is unrealistic for the process of purchasing properties to be in the public domain. Even where a council is the only potential purchaser, a deal is not concluded until exchange and completion. In theory, it could go awry at any point prior.

Whether the decision is being taken by members or officers under delegated powers, it should be based on a written appraisal of the property, which comments on matters such as the financial standing of the current tenants and projected costs and income, together with assumptions on any void periods and opportunities for increasing capital values.

In short, it would represent the council’s “business plan” for the property and should rightly not be published, because it might give the seller scope to renegotiate the price or undermine the council’s position compared to other potential purchasers. This is relevant if the property is on the open market, not only if there is an auction.

Tenants – with whom the council might soon have a relationship as landlord – would also not expect a public commentary on their financial affairs.

While I can’t claim that Wyre Forest DC is a best practice exemplar, I can offer a few pointers from our experience.

As part of the medium term financial strategy in 2017, the council agreed to create a £25m capital portfolio fund and £10m development loans fund, both funded from prudential borrowing. Investments have to meet the cost of interest and repaying the capital and produce a return on top.

Strategies for both funds were agreed by the cabinet in June 2017. They set out where we might invest and a scoring matrix to assess whether to go ahead with a purchase.

Individual proposals are subject to extensive due diligence on the quality of the property, financials, risks and so on. This takes time, effort and money, as well as external advisers, but is vital. More than once we have had to abandon proposals on finding that the property is not as attractive as the – often brief – sales particulars suggested.

Wyre Forest DC was among the first councils to adopt a capital strategy in 2018 following the third edition of the Ministry of Housing, Communities and Local Government’s statutory guidance on local government investments. This sets the context for our existing approach. We’re updating the strategy at the moment to include a new section on ethical considerations.

All proposed investments are considered by an overview and scrutiny sub-committee before a decision is taken by cabinet (usually a sub-committee, for speed of decision-making). These involve fulsome reports including specialist market assessments, property surveys and so on.

At all stages, there is close involvement of the council’s section 151 officer and external oversight by our auditors, who have raised no concerns about our approach or individual decisions.

Once completion is achieved, we announce the purchases. The acquisitions then appear in public reports in terms of how much of our capital portfolio fund we have used. Regular budget monitoring reports show what income is achieved which, thus far, is better than we projected. The council’s property investments have helped us move a bit closer to financial self-sustainability.

We need to ensure a strong message that councils can appropriately balance transparency, mitigation of risk and achieving a return from their property portfolios.

Ian Miller, chief executive, Wyre Forest DC

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