Since the austerity measures introduced in 2010, local authorities have been left to consider new and innovative ways in which they can generate income to fund vital public services. The acquisition of commercial property has been popular, with councils spending an estimated £6.6bn over the last three years on purchasing commercial outlets, mainly through loan finance provided by the PWLB.
Local authorities have long had the power to enter into commercial arrangements which includes the ability to borrow and invest in real estate. However, there is an increasing tension in meeting the balance between acting in a way which furthers a local authority’s commercial interests whilst meeting the overriding public policy objectives.
And let’s not forget that these investments are subject to a number of constraints that would not concern a private investor. Any commercial property transaction must comply with the public procurement rules, the rules on State aid and the Best Value Duty. A council has to wear two hats: one considering the commercial interests and another its public sector duties and obligations. Taking enforcement action against failing commercial tenants, for example, has negative publicity implications that will not apply in the same way to a private landlord.
So, why do they invest? Primarily to generate income to plug the gap from reducing Central Government funding. However, often these investments have a regeneration policy underlying them which sits more comfortably with public sector policy. There has, however, been an increasing trend of out of area investment which are purely commercial in nature.
The Commons Public Accounts Committee has recently launched an inquiry which seeks to explore issues presented in the National Audit Office’s report on local authorities’ investments in commercial property, raising the following questions:
- Is commercial property a safe investment?
- Have local authorities fully considered the potential risks involved in such acquisitions?
- Are local authorities receiving value for money? Are councils are meeting their Best Value Duty?
- Do local authorities have the commercial skills and abilities to properly manage these investments in a way that yields a decent return? Local authorities are increasingly appointing consultants and agents to manage their property portfolios.
- In the light of COVID-19, will local authorities be able to meet their borrowing obligations or will the Government need to bail them out? In addition, will the pandemic impact on the markets they have invested in? There is a moratorium on evicting tenants and serving statutory demands where rent is unpaid. How will this affect service provision if income which is forecast to be received is significantly lower as all sectors struggle with the economic crisis?
The Government has already committed £1bn to help struggling councils during the pandemic amidst a fear that they will go insolvent. There is no doubt that advice from expert professionals is more important than ever to ensure that local authorities are not unduly exposed to market risk, ensuring that any such investments are part of a balanced portfolio to minimise the inevitable issues which will arise with market downturns.
Lucy Woods is partner at Ashfords LLP
