Local councils in England are racking up huge debts by buying properties such as business parks, offices and warehouses, according to research from The Bureau of Investigative Journalism, essentially gambling the future of their public services on the property market.
The councils have borrowed large sums of money to make the purchases, found an investigation led by Gareth Davies at The Bureau Local, with some investments far exceeding their total annual budgets.
Freedom of Information requests submitted by The Bureau revealed that in the past financial year alone councils across England have spent £1.8 billion on investment properties.
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
Properties bought up by councils include a BP business park in Sunbury, bought by Spelthorne Council for £392 million, and branches of Waitrose and Travelodge purchased by Runnymede District Council for £21.7 million. East Hampshire District Council purchased a Tesco Extra store for £38.8 million.
With the current property market in volatility as we head towards Brexit, experts have said that the purchases – financed through borrowing – are risky, with the ramifications on the taxpayer serious.
“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,” Don Peebles, head of policy for the Chartered Institute of Public Finance and Accountancy, told The Bureau. “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.”
Spelthorne Council has borrowed £1 billion, a whopping figure 46 times larger than its net annual budget of £22 million. Other councils, including Woking, Runnymede and Eastleigh have borrowed more than 10 times their budget to pay for property acquisitions.
The councils are borrowing their money in the form of low interest loans from the Public Works Loans Board, a governmental body which hasn’t set any limits of how much the councils are allowed to borrow.
The Bureau found that the government did advise against such borrowing to profit from investments in April, but it seems this warning was unheeded, as over 40 councils have invested in property since then.
All of these investments would be fine if we knew the economy was definitely going to be okay
Other large purchases, which according to the data have increased six-fold from 2013-14, include a £17.2 million spending spree by Broxbourne Council in Hertfordshire on a site occupied by Tesco. This particular site was 170 miles away from Broxbourne, in Grimsby. Torbay Council, located in Devon, dropped £70 million on a warehouse in Kent, some 230 miles away from Torbay. These are just two examples of councils investing in property far outside the area they represent, said The Bureau.
Big spenders – who spent what?
- BP main site, Spelthorne – £360 million
- Kingsmill Business Park, Kingston Upon Thames – £170 million
- Pine Trees Business Park, Runnymede – £80.7 million
- Castle Quay, Cherwell – £58.4 million
- Malvern Shopping Park, Surrey – £71.2 million
Data from The Bureau of Investigative Journalism
Labour county councillor for Surrey, Robert Evans, told The Bureau: “People in Spelthorne ought to be worried about this because it’s mortgaging the services they rely on.”
He continued: “All of these investments would be fine if we knew the economy was definitely going to be okay. But we had the Governor of the Bank of England saying that if things go wrong prepare for a financial downturn.”
The Bureau found that Spelthorne has purchased 12 investment properties totalling £1 billion, with financial reports published in November showing these purchases have left the council with £26 million in repayment costs.
But a spokesperson for Ministry of Housing, Communities and Local Government said: “Councils are responsible for managing their own finances and making the right decisions for the communities they serve – including making appropriate investments.
“Updated guidance came into effect in April and these new cases, developed in conjunction with councils, strike the right balance between allowing them to continue to be innovative while ensuring that taxpayers’ money is properly protected.”
Of course, with council budgets slashed dramatically by central government in recent years, councils have few choices when it comes to looking for income opportunities. The potential for lucrative returns from large investments look appealing, said The Bureau, especially when coupled with easily accessible low interest loans from the Public Works Loans Board.
The Local Government Association said that councils have to look for “alternative” sources of funding, and a spokesperson told The Bureau: “Councils face the choice of either accepting funding reductions and having to cut services as a result, or making investments that can secure those services in the long term.”
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But regardless of the potential of such investments, these councils still have to repay the debts they have made; debts that are unavoidably at the mercy of the commercial property market.
“It means services have a built-in instability which was never intended within the design of local government finance,” Peebles said.
Image: Derelict property in Blackpool, iStock