LAI0019

Written evidence submitted by Mr Will Thomson - SOCIAL INVESTMENT BUSINESS

Introduction to Social Investment Business

Social Investment Business (SIB) provides loans, grants and strategic support to charities and social enterprises to help them improve people’s lives. We specialise in helping organisations become more resilient and sustainable so that they are in the best place to grow and increase their impact.

SIB has one of the largest and most mature social investment portfolios in the UK and one of the most significant track records in providing finance and support. Between 2002 and 2018-19:

• SIB has disbursed £180m in loan finance to 490 charities and social enterprises, alongside £133m of grants (of which £45m was used in blended deals).
• SIB has disbursed a further £115m in grant funding to 1,900 organisations
• In 2018-19, SIB currently manage an investment portfolio of £55m
• Almost 40% of SIB’s portfolio work is in the top 20% most deprived areas in the country.

Having worked with more than 2,000 organisations over the past 15+ years, we have built an in depth understanding of the financial needs of the social economy – whether that be through grants, loans or blended finance.

As a charity that provides finance to create fairer communities, we are interested in developing models of regeneration that channel profits back into the local area, while remaining accountable to the local communities. Our data-led approach utilises local economic modelling to target funding where it is needed the most, while ensuring the investment mix reflects the social and economic capacity of an area.

Summary

• This submission focuses on local authority investment in shopping centres, something that has become increasingly common over the past five years but proves to be a risky investment amidst poor returns, declining footfall and shifting consumer behaviour – this is before considering the economic impact of the coronavirus pandemic.

• SIB has been analysing local transaction data which gives an insight into the economic shock caused by the coronavirus pandemic – it shows severe reductions in economic activity in the wards where several local authority-owned shopping centres are situated. The economic shock of coronavirus will have an impact on the long-term viability of any commercial investment and is likely to exacerbate any risks borne by the local authority purchaser.

• There is a place for local authorities to properly invest in their administrative areas. However, this must be targeted to support local economic development in sustainable and resilient ways. This form of patient and long-term investment will be vital to rebuilding local economies in the post-coronavirus recovery period.

1. Pre-coronavirus market context:

1.1. The returns from across the retail sector have been poor in recent times. The MSCI Index shows a decade of retail underperformance and, within those returns, the retail sub-sectors show shopping centres to have been a notable underperformer.[1] According to the most recent Knight Frank Shopping Centre Investment Quarterly (Q3 2019), the market outlook was ‘disappointing’, with deal volumes below the long-term average due to ‘investors grappling with the many negative forces impacting the UK retail market at present.’[2]

1.2. The changes being seen in the retail sector are deep and structural. As e-commerce has grown steadily over the decade, footfall in high streets, retail parks and shopping centres has declined by 10% over the past 7 years. Research from Springboard and the BRC found that retail footfall had decreased by 1.7% YOY in September 2019 – the most marked decline was in shopping centres, with a total 3.2% decrease in footfall on the previous year.[3]

1.3. While there were signs of this trend reversing just before the crisis – in February 2020, shopping centre footfall rose for the first time since March 2017, with a small increase of 0.2%[4] – it is likely that the long-term effects of the coronavirus pandemic will reverse any gains, as the economy enters into a deep and prolonged recession following the lockdown.

2. Economic shock from the coronavirus pandemic:

2.1. SIB has access to anonymised open banking data on merchant sales and consumer wallet spend at the ward level generated for us by the Impact Information Company (Imfoco), which captures transaction data from at least 12% (and up to 27%) of the population across the country. By analysing these flows, we can compare economic activity in the latest week available with the equivalent week last year and assess the scale of the impact of the current crisis in close to real time.

2.2. The lockdown measures introduced by the Government have caused an unprecedented economic shock, with a collapse of consumer spending since March 2020. We have been working with Tortoise Media to evaluate the impact on local economies across the country – where some towns are experiencing a collapse of near -70% in total sales compared with the same week last year.[5]

2.3. We have delved further into this data to see the impact on shopping centres that have been purchased by local authorities over the past five years. The following table includes some notable examples of local authority investments picked out in the Knight Frank Shopping Centre Investment Quarterly. The percentage drop is for the week 8th – 14th April over the same period last year.

Table 1 – Year-on-Year Percentage Decline in Total Sales in Shopping Centre Wards (8th – 14th April)[6]

2.4. This provides a small snapshot of the immediate impact on economic activity in the wards where each shopping centre is located. Drops in consumer spending would be expected as a consequence of the closure of all non-essential shops. Nevertheless, this collapse in economic activity will persist for as long as the lockdown is in place and total sales are likely to remain lower than the baseline for the foreseeable future, as social distancing measures impact consumer behaviour (e.g. accelerated shifts toward online retail; declining footfall due to limits on the amount of people allowed in shops at the same time).

2.5. The economic shock of coronavirus will have an impact on the long-term viability of any commercial investment and is likely to exacerbate the risks borne by the local authority purchaser – especially in the case of shopping centre investments, which were already underperforming before the pandemic hit. Moreover, local authority finances have been put in an increasingly precarious position due to losses caused by the pandemic – with some councils now at risk of issuing section 114 notices.[7]

3. Long-term investment for a fair recovery

3.1. While we broadly support local authorities investing in their administrative area, we are concerned about the risk to local authority finances as the sole investor and manager of commercial property such as shopping centres – especially if the use of the property is no different from that of a traditional retail investment, where returns were already poor. This is pertinent if, as noted in the NAO report, local authorities become dependent on commercial property income to support services.[8]

3.2. There will be a stark necessity for investment in the post-coronavirus recovery period. The economic impact of coronavirus will further entrench existing inequalities in the UK – many of the most vulnerable communities will struggle to bounce back when the social distancing measures are eased. The places that have been already been very badly hit – such as coastal towns heavily reliant on tourism – had very little resilience to this kind of economic crisis in the first place.

3.3. There is a place for local authorities to properly invest in their administrative areas. However, this must be targeted to support local economic development in sustainable and resilient ways – investing in a social and green economy that puts income and employment as its most important outcomes, not profit maximisation. Some local authorities have been exploring innovative investment models to support their strategic priorities: West Berkshire Council has recently approved the UK’s first Community Municipal Investment, offering residents and community groups an opportunity for long-term, low-risk investments alongside the council in projects that align with the council’s environment strategy.[9] Similarly, Stoke-on-Trent[10] and Hackney[11] councils have made pioneering investments in local energy projects that will benefit residents and businesses while paving the way to a low carbon future.

3.4. Coronavirus has exposed the need for a fresh approach and, in this new context, the purchase of a shopping centre as a traditional retail investment is not appropriate. Instead, rebuilding fairer communities as we enter the recovery period will require patient, flexible investment that develops social and green infrastructure, provides good employment and secure incomes to local people, and channels profits back into to the local area.

May 2020