The number of councils investing in real estate has doubled in the last two years with in-year spending rising to £1.8bn.
With spending patterns for 2018-19 suggesting councils are continuing to increase their levels of investment, concerns have been raised about the level of risk to which some local authorities are exposing themselves.
Research by The Bureau of Investigative Journalism, in conjunction with LGC, found the number of councils investing in assets they deemed ”investment property” increased from 35 in 2015-16 to 71 in 2017-18. Properties purchased typically include offices, hotels, supermarkets, and gyms, sometimes miles outside of a council’s own area.
According to Freedom of Information responses from 309 out of 353 councils contacted, the amount spent on properties bought specifically for investment purposes has risen from £76.4m in 2014-15 to £1.8bn in 2017-18. About £340m was spent on investments in the first quarter of 2018-19 which is more than twice as much as the £131m spent in the same period the previous year.
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Source: YouGov poll of 1,737 adults 27-27 November
While the findings contained in this report are focused specifically on property and land bought to generate income, councils have bought more than 2,270 assets not for this purpose as well as another 1,250 for which information about its purpose was not provided.
Experts warn that commercial property investments are volatile and Bank of England governor Mark Carney said in September that a no-deal Brexit could cause property prices to crash.
Don Peebles, head of policy at the Chartered Institute of Public Finance & Accountancy, said: “If you look at the most extreme examples, there are public services used by vulnerable people which are dependent on how well rental income in the property market is doing.
“This is a risk that local authorities have never been exposed to before and you have to ask whether they are equipped to handle that risk.”
An LGC investigation last year highlighted how Spelthorne BC was spearheading a drive to invest in property to help fund services. At the time Spelthorne, which has the 15th smallest budget in England, had invested £440m in property. It has now borrowed £1bn from the Public Works Loans Board to fund its investment activity in 12 properties or sites.
Alongside Spelthorne three other councils – Woking, Runnymede and Eastleigh BCs - have borrowed more than 10 times their net revenue budget to finance property deals, the Bureau’s research found.
Spelthorne’s annual repayment costs total £26m - more than its net revenue budget of £22m for 2018-19. However, the council said the annual rental income generated by the assets has reached nearly £40m, enabling it to put £7.5m of this commercial revenue towards its annual budget.
Leader Ian Harvey (Con), who has a background in property investment, said Spelthorne’s due diligence processes were extremely robust and described the council’s approach to investments as “restrained, prudent and risk-averse”.
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But the council’s auditor, KPMG, has yet to sign off Spelthorne’s accounts for the past two financial years.
KPMG said the 2016-17 accounts “did not appropriately reflect the significant transactions that took place during the year, such as the acquisition of the BP campus or the drawdown of over £400m in loans”. The council said this was the result of the departure of both its chief and deputy chief accountants, as well as “some issues with the interim cover”.
In July the auditor also withheld judgement on Spelthorne’s 2017-18 accounts while it undertook a review of the properties the council has purchased.
Spelthorne has since replaced KPMG with BDO. BDO rents office space in Reading’s Thames Tower, which Spelthorne bought in September for £285m alongside two other offices in the region. In a letter to the authority, BDO said the firm had concluded there was no conflict of interests in the council being one of its landlords.
Analysis of Spelthorne’s spending also shows payments totalling £3.4m to external property and finance consultants. One company, Cushman & Wakefield - a US-based real estate firm - has been paid £2.3m since the beginning of 2017.
A company spokesperson declined to answer a list of questions other than to confirm it had provided “property-specific advice on individual acquisitions” to Spelthorne.
Spending records for other councils show that Cushman & Wakefield has also provided services to at least 120 other local authorities, at a cost of at least £34m since 2013. However, this data covers other services and not just those relating to property investments.
Duncan Whitfield, president of the Association of Local Authorities Treasurers Society and Southwark LBC strategic director of finance, said he had “no doubt” all deals had been “subject to the closest scrutiny and appropriate levels of specialist advice”.
He added “where a small number of councils have pushed boundaries” in terms of the size of their portfolios, the sector should “not be surprised” Cipfa had “issued revised statements to clarify and strengthen local authorities’ accountability for capital investment and borrowing.”
A Ministry of Housing, Communities & Local Government spokesperson said: “All local authorities must properly consider the risks and opportunities before making commercial decisions.”
The Local Government Association said councils had little choice but to look for “alternative” sources of funding as the gap between the money local authorities receive and what they need is estimated to rise to £7.8bn by 2025.