More than a third of councils actively investing in revenue raising property since 2010 own land or buildings outside their area, LGC research has found.
Asda, Ystalyfera, Wales
The practice of councils purchasing property outside their boundaries has attracted particular controversy from outside the sector, with Liberal Democrat leader Sir Vince Cable suggesting councils were “gambling” with public money.
Overall 265 councils responded to LGC’s freedom of information request. Of the 94 councils that told LGC they had purchased property specifically to generate an income since 2010, 37% owned property outside their area. This was worth a total of £619m.
Of the 94, a fifth owned property outside of their area worth £10m or more. However, in many cases this was part of the council’s historic investment property portfolio rather than a new investment and a number of councils stressed these assets were close by.
For example, Plymouth City Council said the £15.2m of assets it owns outside its boundaries were still within its “zone of influence/travel to work area” and included an industrial estate on the outskirts of the city in South Hams DC.
However, some districts have invested entirely in property outside their area since 2010. Mansfield, Adur and Mole Valley DCs all made significant purchases. Adur invested £11.6m in an office block outside its area, its only property investment since 2010, which increased the size of its investment portfolio by 60%.
Mole Valley invested £10.8m in an Asda supermarket near Swansea, almost 200 miles away, while Mansfield has made purchases in Scotland, Manchester and London totalling almost £24m.
Surrey CC has spent £186m outside of its area since 2010, accounting for 78% of its investment properties. A spokesperson for Surrey said investments outside the county meant the council could spread its risk by developing a diverse portfolio.
“We’re trying to generate the best possible return for the services Surrey residents value and will therefore consider investing in a range of appropriate opportunities wherever they arise.”
Charles Yarwood (Con), Mole Valley’s executive member for assets and investments, defended the Asda purchase which is due to provide an annual rental income stream of £600,000 for the next 20 years. He said: “The purchase is very low risk given that the tenant, Asda, is a highly reputable organisation… [The council] is confident that this purchase was the right property at the right price and represents value for money for taxpayers.”
The council has decided to make a further £40m available for the purchase of commercial property.
Cllr Yarwood added while the council would like to find, and would continue to look for, investment opportunities within the council’s boundaries, “in practice… we need to cast the net much wider”.
Southampton City Council has investments in Cambridge and the West Midlands. LGC’s research found Southampton owned £15m of property outside of its area as part of its £130m investment portfolio, £30m of which had been purchased since 2010.
The council’s head of capital assets Mark Bradbury defended the practice of councils investing out of their area at the Association of Public Service Excellence conference in September.
He said: “If a business goes bust [in your area] it’s not just the rent that you lose, it’s the council tax, business rates, the disposable income of people who worked there. Investing beyond your boundaries is an obvious thing to do as part of a balanced portfolio.”
But while finance professionals agree councils investing outside their boundaries can make sense from the point of view of spreading risk, there is still concern in some quarters about whether it is entirely appropriate.
Gareth Davies, head of public services at Mazars, said out of area investments required a “much higher standard of evidence of why that’s in the council interests”.
“You have lost the justification that this is an investment in economic health of your area… it’s then purely a commercial investment for income return. The local government finance profession is not completely sanguine about this.”
In addition, politicians often prefer to make investments that can be seen to benefit the local area.
John Rice, director of commercial services at Runnymede BC, which is one of the biggest post-2010 property investors, said: “From an asset management point of view it makes a lot of sense to diversify [location]. From our point of view the member direction is [that] where we are making acquisitions they don’t want the benefit to be outside the borough.”
Of the £160m the council has invested in income-generating property since 2010 it has made one purchase outside of its boundaries, albeit for almost £65m. Mr Rice told LGC this was a property in central London which had very high returns and provided cashflow for a regeneration project within the borough.
Ultimately the debate over out of area investments comes down to whether it is judged appropriate for councils to act purely as disinterested investors, focused solely on the bottom line. But if the government is not happy with this approach perhaps it should have been more careful what it wished for when it began encouraging councils to think more commercially.