Way back on 29 January, we commented in “Council Splurge on Commercial Property Will End in Tears” that some local authorities were trying to make up for cuts in their funding from Central Government by buying commercial property all over the country. Last weekend, (6 months later!) the Sunday Times ran the same story, titling it “Tiny town hall is £1bn property tycoon”.
The attractions are easy to understand…… the Government seems happy to lend huge sums of money to local authorities at tiny rates of interest and with apparently few questions asked. I wish they’d do the same for me!!
Central funding of local councils can be around 80% of their overall income – and so when this was cut after the Great Financial Recession, it must have hurt badly. So we admire the entrepreneurial spirit of councils like Spelthorne, who have borrowed cheap money and put it to work. Their efforts have been so successful that, according to the ST, Spelthorne now enjoys more income from property than from council tax.
But the risks remain. Commercial property values can be hugely volatile. What happens if there is a huge fall in values – say 50% – and suddenly Spelthorne loses £500 million? That is rather a large amount of money! It will only be a paper loss – until they sell – but it will still show in their accounts. Only a fool puts all of their investment cash into one kind of asset.
And one has to ask the question;- Why have they been investing in office blocks and shopping centres all over the country, when some of the investment funds could have gone into local housing, which would have created income and opportunities for people in the borough to access rental homes? A sensible investment approach would have allocated investment to other, non-correlated assets too – say shares, loans to local businesses, corporate bonds and so on. No investment is foolproof, but at least a spread of assets means they are less likely to collapse in value all at the same time! They could have at least invested in offices and shops within their area to gain a return and develop the local economy.
We will watch this space with interest over the next few months. Rather scarily, it is much easier to see commercial property losing 50% of value than it is to see it gaining 50%. And that is going to hurt Spelthorne and similarly daring councils.