Written evidence submitted by Tendering District Council
Comments on Commercial Property Investment via Borrowing
- Borrowing to invest in commercial property is always going to be a difficult activity to justify. It potentially generates a property ‘bubble’ that could expose the relevant Local Authority to unnecessary risk at a serious enough level that could jeopardise its overall financial sustainability.
- Although the NOA report makes the link with regeneration, a greater justification could be if the purchase was made to address a failure in the market – the risk of borrowing to invest therefore could be better balanced on such grounds and could feature in any guidance that may be issued in future. Having said that, the Local Authority could take a more facilitating role rather than through direct investment itself.
- The idea we are using in Jaywick Sands (where there is private market failure in housing delivery) is to invest in small phases to stimulate the market to the point where it takes over allowing the Council to withdraw from any further direct investment. This seems a more balanced approach rather than making the more extreme one-off significant investments in commercial property that some Local Authorities have undertaken. Similarly to the above, this could be something that featured in future policy guidance
- I think it is unfortunate that a small number of local authorities are taking extreme positions with regard to the scale of borrowing for commercial property investment, which spoils it for the more sensible ones – at the end of the day Local Authorities do want to maintain flexibility to invest in commercial property but within a robust framework.
- In terms of a robust framework, it could be argued that the existing prudential codes is at too high a level that relies upon self-regulation and does not necessarily drive any level of consistency across the Country at a practical / operational level. High level guidance often states that it is for the Local Authority to determine things like affordability in consultation with its External Auditor.
- Although not wanting to interfere to much with local flexibility, it would seem appropriate to translate / interpret the high level framework referred to above by supporting it with more detailed guidance that Councils have to demonstrate that they have followed when investing in commercial property – whether financed by borrowing or not. At the moment it is not that difficult to present a case locally that meets the high level prudential code requirements.
- Although from a slightly different perspective, Tendring District Council have put in place their own Commercial Property Investment Policy (copy attached) which was developed in consultation with our External Auditor. It sets out a number of steps / thresholds that need to be considered / reached when investing in commercial property. Something along these lines could be developed by CIPFA that translates high level guidance into more detailed guidance that would be compulsory for Local Authorities to follow in specific circumstances.
- Although Tendring did not borrow to fund its own commercial property investment, any policy could be amended to perhaps include a gearing threshold with say the most that can be borrowed to invest in property is 30% with the remainder coming from existing funds.
- Investing in Commercial property to raise income to support local authority budget also raises a number of important questions and taking a more strategic view of Local Authority Financing, it could be argued existing rules present a bit of a carrot or stick analogy.
- There are currently restrictions that prevent Councils from increasing income and therefore it could be argued that these drive some Councils to the more extreme income raising strategies that we are seeing with commercial property investment financed by borrowing.
- The best example of this is the restriction around fees and charges and that Councils can only set prices to recover costs. This remains a significant frustration, as without this restriction, Councils could revise their pricing structures to raise additional income. There are many instances of where this severely limits the ability to raise money locally even where market conditions allow and without unfairly skewing the local market.
- It is accepted that Local Authorities can set up separate companies to enable them to trade without such restrictions but this is counter intuitive as it adds unnecessary overheads / additional costs that dilutes the benefit that increases in fees and charges could provide.
- Apologies if it appears that I have moved away from the question about investing in commercial property, but I think this is an important overlapping issue. Based on the above it would be welcome if the Government undertook a piece of work to explore such restrictions on Local Government funding. The timing is currently perfect for this given the move to a self-financing environment following the removal of the revenue support grant and Councils are looking to operate more commercially but without taking unnecessary risks going forward.
- With a genuinely positive outcome from such a review, Local Authorities may be less likely to be driven to the more extreme strategies we are seeing, as they would have to demonstrate why they were more favourable than existing and less riskier options of raising money such as through fees and charges.