Watchdog to examine Kent Councils £373 Million Property Investment Spree
With the world concentrating it’s attention on the Covid-19 pandemic other issues are, understandably, passing unnoticed. One of these issues is the announcement by Parliament’s spending watchdog to launch an inquiry into purchases of commercial property by local authorities, amid fears that the coronavirus pandemic will expose councils to a drop in income from their investments.
Eight Councils in Kent between them have invested £312,000,000 million on property investments between 2014 and 2019. Add in £61 million from Folkestone & Hythe District Council takes the total spend close to £373 million pounds worth of property/land investments. We suspect there has been further purchases in the financial year 2019/20.
Since 2015, Folkestone & Hythe District Council have gone on a near £61 million pound shopping spree, purchasing land and property, according to the land registry and the council’s asset register. This was done to increase their revenues and to offset the impact of austerity measures introduced in 2010. Other Councils have spent far more than ours. Spelthorne District Council (Staines) has built a £1bn portfolio using cheap Treasury-backed loans as a way of countering £2.5m of government grants cuts.
The public accounts committee will look into whether local government officials have the commercial skills required for such transactions, which have rocketed over the past four years.
However, in a document released during lockdown by the Ministry of Housing, Communities & Local Government (MHCLG), on April 20th 2020, it spells out that Councils do not have the acumen or commercial skills required. It states:
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Local authorities are exposing themselves to too much financial risk through borrowing and investment decisions.
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There is not enough transparency to understand the exposure that local authorities have as a result of borrowing and investment decisions.
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Members (Cllrs) and decision-makers (Officers) are not equipped with sufficient expertise to understand the complex transactions that they have ultimate responsibility for approving.
Don Peebles, Head of Policy for the Chartered Institute of Public Finance and Accountancy (CIPFA), which oversees council finance and publishes the guidelines local authorities are supposed to follow.
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“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.”
The spending spree has been made possible by councils’ easy access to low interest loans from the Public Works Loans Board (PWLB), a national government body. There are no limits to how much councils can borrow and they do not have to prove they can afford it – the PWLB leaves this up to councillors to decide.
However, on Oct 9th 2019 the Treasury increased the interest rate for the Public Works Loan Board (PWLB) by one percentage point — meaning the typical rate for a loan is now 2.8% instead of 1.8% — in a move seemingly designed to discourage councils from borrowing to fund “risky” multi-million property investments.
Many Councils will find themselves in a difficult position as they already have considerable debt with the PWLB, so borrowing more, when the finances may not roll in as predicted, may be difficult to square with more than £1 billion worth of debt.
The pandemic is expected to create a hole in many council budgets due to a huge shortfall in council tax income, along with lost revenues from missed parking, leisure fees during the coronavirus lockdown.
KCC complained today (01/05/20) on BBC South East Today it has a shortfall of £63 million, already and we are less than five weeks into the new financial year.
In the last recession UK commercial property values and market rental values both fell. There are economists saying we will not have a recession, but a depression, after the coronavirus pandemic.
Our council like all other councils who’ve been on shopping spree in the last five years will suffer. This is supported by the National Audit Office report – Local authority investment in commercial property – released on the 13th Feb 2020; which warned of the risks associated with commercial property, which could leave councils badly exposed by a recession or property crash. The NAO’s warnings have in regards to council investments been proved prescient given the current circumstances.
Given that other eight Kent Councils, including ours, have spent close to £370 million between 2014 and 2020; how long before they’ll recoup the value of these properties purchased, if ever!
Bear in mind the performance of the retail sector with the shift to online sales, among other factors, leading to growth in vacancy and void rates has only exacerbated the gutting of our high streets, these investments now look like a risk too far for many of the councils.
Also how could we forget the £3 million high street fund made available to businesses across the Folkestone & Hythe District. In the bid for money from the MHCLG, made by Dr. Katherine Harvey (pictured), Chief Economic Development Officer at FHDC in Mid March 2019, she made it clear at page 6:
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the health of Folkestone’s shopping area is expected to suffer further in light of imminent business decisions expected across the retail, banking and leisure sectors and our analysis indicate that the shop vacancy rate could increase to as much as 25.5% in the Primary shopping area and potentially substantial job losses.
This was an accident waiting to happen and the problems in Folkestone will be exacerbated by a Council that increasingly relies on temporary staff. I suspect that many town centre shops will cease to be viable in a post pandemic environment.
As a result, high streets all over the country will have to be re-purposed to support e.g.leisure activities. Where this is not possible, former retail units will have to be converted to residential use.
There are already precedents for this as many former hotels in Folkestone have either been converted into flats e.g. The Grand and the New Metropole or, demolished and purpose built flats errected e.g. Homepine House.
As revenue from business rates declines local Councils will either need more support from central government or Council tax will have to increase to help local councils balance their books.