Written evidence submitted by the District Councils’ Network
About the District Councils’ Network
Why district councils invest in commercial property:
1.1 For the past decade, largely as a result of funding pressures, councils have been encouraged to think more commercially, and to be innovative in finding ways to fund services and deliver on local priorities. District councils have worked hard to make savings and become self-sufficient over the past decade as funding from central government has fallen, while demand for services has increased. District councils have faced the biggest reduction in their spending power since 2015 compared to other types of councils.
1.2 Income from fees and charges now represents up to 70% of district councils’ revenue expenditure (2018/19). Income generation is a key part of preserving services for residents and it is income that is raised locally that provides authorities with greater security, as there continues to be significant uncertainty with resources received from central government.
1.3 District councils have also been investing to help grow local economies. In shire counties, most district councils lead on local economic development – investing in regenerating town centres and public spaces, attracting business, providing local homes, and leisure opportunities, and working in partnership with shire counties on the local transport network.
1.4 District councils have legal powers to make commercial property investment both inside and outside their area, as set out in S120 of the Local Government Finance Act 1972. Having invested in commercial properties, councils are much more likely to support local business tenants to ensure they are successful than an institutional investor looking for a return. Councils also have a vested interest in the local area leading to enhanced social responsibility when managing, maintaining and developing the property. Many institutional landlords will not adopt that approach.
1.5 The investment into commercial property by local authorities can also strengthen the Public Sector Balance Sheet and it is this point that is often overlooked. Where those investments are generating a positive return, this supports the revenue budget and is a key factor in maintaining services. When loans are repaid this reduces the liability and the investment is shown as an asset on the balance sheet and is one that generally appreciates in value. It is these two factors that increase the strength of local authorities’ balance sheets.
1.6 Decision making on what and where to buy is driven by the overarching priorities for each district – whether that’s buying locally or in their functioning economic geography to invest in job creation or regeneration or buying outside their area to enable the asset to be managed on a purely commercial basis, maximising the return, for investment in services locally. This approach is no different to that taken by private sector organisations where the overarching aim is to have a balanced portfolio of assets.
Setting effective governance and managing risk:
2.1 The DCN considers that the current regulations around commercial investment are sufficient to ensure robust decision making and risk management. It is not necessary for central government to maintain further oversight – central government has challenged local government to become innovative and self-sufficient. Therefore this management of risk is rightly done at a local level, by elected members accountable to their residents and on the professional advice available to the council.
2.2 Councils are already subject to the Prudential Code on capital finance. Any major decisions would require appraisal through a strong business case including risk assessment and mitigation. As democratically-elected bodies, decision making is subject to scrutiny, and investment strategies require full council approval.
2.3 Supported by professional advice from their Section 151 Officers, districts undertake significant and extensive due diligence. It is important to note that S151 officers are required to be qualified accountants, and members of professional bodies, and that this brings with it a requirement for continuous professional development so that skills remain up to date and relevant. Most councils would typically also depend on external advice or consultancy for some or all the following elements:
2.4 Many councils have opted to outsource their commercial portfolios to market leading companies that are experts in this area. This is often because councils have recognised their own limitations and lack of capacity or capability. This has reduced risk and provides elected members with the reassurance needed to make proper decisions where portfolios are managed externally. Where portfolios are managed externally, management companies would report back on the performance to elected members, just as a private enterprise would report back to shareholders.
2.5 There are also a range of tools available to support councils to develop their commercial expertise and consider risk management and contingency planning. For example, the LGA has for several years also developed guidance and support for councils – both officers and councillors.
2.6 The NAO report into local authority investment in commercial property notes that ‘most authorities’ acquisitions are of properties able to generate average, near to average or above average market rents’ indicating that local authorities are making good value investments. We note that the NAO’s report does not provide any context on the rationale for commercial property investment – which is often driven by economic development or regeneration, alongside yield.
3.1 The NAO report acknowledges that 86% of authorities account for 20% of cumulative spend, with only a small proportion of authorities undertaking high levels of borrowing.
3.2 Councils have access to the PWLB borrowing facility. Some private sector property companies often complain about this as unfair, but councils also have to put a side MRP to repay the borrowing which evens any unfairness out. Most private landlords borrow on interest only terms or use investors capital both of which mean they can bid considerably more than councils for properties should they wish to.
The Impact of the Covid-19 Pandemic
4.1 District Councils have responded quickly to the coronavirus emergency to help residents and businesses. They have set up the Local Support System, helping the vulnerable, and the homeless. They are working at pace to deliver lifelines to local businesses. They are collecting the bins and keeping parks open. District Councils are thinking about how they can get growth and jobs moving as the economy begins to open again.
4.2 The pandemic is having an unprecedented impact on our towns, cities and communities, as well as on the financial position of district councils themselves, potentially creating the perfect storm.
4.3 Additional funding provided by the Government to date has been welcome, and we would like to take this opportunity to thank officials and ministers for the financial support provided so far, albeit recognising that the combination of increased costs and lost income means that significant further support will be needed going forwards – we note the LGA has estimated that the amount of support councils may need will be 3 or 4 times the funding received so far.
4.4 Existing challenges have become even more urgent and pronounced – such as the impact on our high streets, and small businesses, but there are opportunities too, to adapt our towns, and capitalise on the improvements in air quality and reduced congestion that have emerged during the lockdown.
4.5 The financial consequences of the pandemic are especially acute for district councils. For many, the combination of higher costs and lower income is as much as 75% of their net budget, for some it will exceed 100% of their net budget. This is a result of an increasing demand for essential high cost services, such as homelessness, continuing and increasing costs in maintaining services.
4.6 Returns from fees and charges and commercial investments, like the rest of the economy, will undoubtedly face pressure over this time. Therefore as we start to plan for reopening public spaces in a safe way, and adapting to this ‘new normal’, it will be crucial that councils get the support needed to sustain services and local economies will positively benefit from public sector investment of important commercial assets which can be used in the best possible way to get growth going again.
5.1 Commercial investment in our towns is not just a financial investment but a wider investment in the economic wellbeing of the area and benefits residents and businesses and can be used to reinvigorate the community particularly important as we recover from Covid 19. Current commercial investments, as well as freedom and financial incentives to do more, can put districts on the front foot as they support local economies to recover:
To take these opportunities the Government should work with Districts to:
6.1 Ensure further emergency grant funding to ensure that the fall in income from fees, charges and commercial income does not impact significantly or permanently on the range of services provided by district councils;
6.2 In exceptional cases (for example, for those districts that derive a far higher proportion of their revenue expenditure on services from income than the average), consider zero interest loans to avoid damaging service reductions and to provide cash flow;
6.3 Leave unchanged the current legislation, prudential framework and policy so that councils can borrow from the PWLB for commercial investments. The PWLB could offer a lower rate similar to that permitted for housing schemes, but for regeneration schemes. The Government should implement this automatically and not await the outcome of the review of PWLB interest rates. Councils have a key role to play in economic recovery. Preventing authorities from borrowing to invest in commercial investments could stifle rather than stimulate the economy.
6.4 Extending government investment beyond the Future High Street Fund and Stronger Towns Fund, would encourage an acceleration of that programme which would give an initial boost to construction, support a whole new approach to town centres, and facilitate residential building.
6.5 Explore further incentives for councils to invest in growing local economy. A short-term stimulus to drive recovery could see the PWLB offer interest free borrowing without the need to put aside MRP for a time limited period.
6.6 We firmly believe that a key principle for future business rates reform is that all types of councils must benefit under a move to 75% retention, particularly given the proud record of district councils in generating growth in their areas.
7.0 The DCN has called for the forthcoming Spending Review to reverse the decline in spending power for districts between 2021 and 2024 and set district councils free to raise income in ways that are locally responsive and accountable.
 Figure 9 - Market rents of commercial properties acquired by English local authorities, 2010-11 to 2018-19 https://www.nao.org.uk/wp-content/uploads/2020/02/Local-authority-investment-in-commercial-property.pdf