More than a third of councils have invested in property since 2010 in a bid to generate additional income and stave off cuts to services, spending more than £2.4bn between them, exclusive research by LGC has found.
More than half of the expenditure was by districts in the south east, including £440m by Spelthorne BC, the biggest spending of the 265 councils that responded to LGC’s freedom of information request.
Of these 35% said they had invested in property specifically to generate an income since the turn of the decade. The property is mainly retail and office space, rather than residential.
While councils have always owned investment properties, defined by the Chartered Institute of Public Finance & Accountancy as property held to generate an income and not used in the delivery of services, these are often land or buildings owned for historical reasons with low returns.
Cuts to central government funding have driven councils to look at alternative means of generating income, including commercial property investments.
|Ten biggest investors|
|Council||Total spend since 2010 on income-generating property|
|Plymouth City Council||£58m|
|Leeds City Council||£57m|
However, this growing trend has attracted controversy with reports of concern within government that councils could be exposing themselves to too much risk. Spelthorne’s purchase of the BP office campus in its borough for £358m last year attracted particular attention.
LGC’s research, which provides one of the most comprehensive pictures to date of the extent of the trend, found the top 10 biggest investors accounted for 60% of expenditure, suggesting a relatively small number of councils are determinedly pursuing this policy to raise significant revenue. Conversely, of the 94 councils actively investing in this way, 52% had invested less than £10m.
Councils told LGC their investments were driven by the need to replace government funding.
Some councils appear to be running higher risks than others
A spokesperson for Spelthorne said: “The strategy of purchasing commercial properties represents a significant step in Spelthorne’s plan to tackle the cuts and protect services. We are being very careful to make sure we understand the risks and have worked with large property consultants and legal experts to mitigate these.”
Of the 82 investing councils that provided information on forecast rental yields, all but one were expecting annual returns of 4% or more and more than half (43) were expecting returns of 7% or more.
Paul Dossett, head of local government at Grant Thornton, told LGC while councils were under pressure on revenue, many had a lot of cash and property was “probably the best rate of return” they could currently get.
He said most councils were managing risks effectively but this was “not necessarily true for all”.
Gareth Davies, head of public services at Mazars LLP, told LGC while he was unaware of any cases of councils making “rash decisions” on investments without taking expert advice there was a “level of concern” in the sector.
“Some appear to be running higher risks than others,” he added.
Sunbury-on-Thames business park
Excluding districts, the biggest investors since 2010 were Northumberland and Surrey CCs, which invested £250m and £240m respectively.
In a statement Surrey said the investments were designed to “provide an income stream to the council” to help “fund vital services” in the face of increasing demand and declining grant.
While Surrey’s investments sit on the council’s balance sheet, in 2012 Northumberland set up an economic development company, Arch, to handle commercial investment. This company was expected to return £25m to the council over three years, however a council spokesperson said there had been “no dividend payment to date”.
The statement added that Arch was currently subject to a strategic review by the new Conservative-led administration which “was concerned about a number of property investments”.
In total districts accounted for 54% of the £2.4bn invested since 2010.
David Bentley, head of asset management at Cipfa Property, told LGC the greater activity by districts probably reflected the fact they had been historically more likely to hold investment property than some other types of councils, especially counties.
The institute has just closed a consultation on its prudential code which took place partly in response to concern about council investment activity.
Mr Bentley said this is likely to “strengthen” the code to make requirements around considering risk, governance and seeking appropriate investment advice more explicit. He added: “Cipfa’s view is that councils should not take on greater commercial risk without improvements in their commercial capabilities, enhanced governance and greater transparency.”
Revealed: the councils spending millions on investment property