Paul Brooks, Executive Head of Regeneration and Property, Rushmoor Borough Council
Supplementary Evidence to the Public Accounts Committee 11th May 2020
The Parliamentary office asked the Royal Institution of Chartered Surveyors, of which I am a member, to facilitate a property professional to give evidence to the Public Accounts Committee. The RICS asked the Association of Chief Estates Surveyors, that represents the public sector, to assist. I have been asked by the President of ACES, as member of its General Council, to give evidence to the Committee on this matter.
My understanding of the focus of the NAO report, and meeting, was whether councils, in their consideration of property investment decisions, understood and mitigated the risk of property investment effectively.
Part of this is what they invest in and part where they invest in property.
In order create a balanced portfolio of asset type, risk and location it is necessary to have a property investment strategy that defines an authority’s approach to risk and returns compared to borrowing or opportunity cost if the money to be invested in property is from reserves.
Observations for The Session of the Public Accounts Committee 11th May 2020
1. Area – there seemed to be an interchanging between the council area and the economic area that is referred to in the CIPFA Prudential Code. For a council with a small administrative area, such as the 39 km2 making up Rushmoor Borough, restricting investment to within the administrative area only would increase risk as councils in need of extra income could take risks by investing in opportunities they would not otherwise take compared to having more options of location. Regeneration is part of the role of local authorities but often carries higher risk than investments that have a long-term, existing income. Councils can take a supportive approach to regeneration and the local economy if they have funds in the long term from investments that have been properly risk assessed. Our independent property investment advisor does not recommend restricting investment to the economic area either. If all assets are bought in borough, for commercial returns, the returns could be impacted by political influences to a greater extent than those bought outside the boundaries. This point of political involvement was a concern raised by some Members of the Committee. Some strategic assets in borough could assist with social value in terms of assisting jobs and industry but might be at risk of not yielding a full commercial return. Also, just owning in borough does not guarantee local benefit as the success of local businesses will be more greatly influenced by the efficiency of the company and buoyancy of its particular marketplace.
2. Legality – reference is made in the NAO report that CIPFA believes it to be traditionally agreed to be illegal to invest directly and not through a company. This does need to be clarified as elsewhere the report refers to councils having contrary advice and the need for Councils to be satisfied direct investment is legal.
3. Options for councils – there was not an exploration in the NAO report, or the meeting, of the alternatives for councils needing to create additional income to counteract reductions in government funding that are not risky but balance the books and ensure the services to residents are maintained. A balanced portfolio of property assets, as developed by pension funds as part of investment strategies for long term growth, achieves this but not if there are fundamental restrictions on location.
4. CIPFA regulating non CIPFA members – Rob Wightman’s suggestion of chief executives and members coming under the regulation of CIPFA seems very ambitious. If CIPFA is to be the regulatory body, rather than MHCLG (and this includes members and chief executives), this looks to be a fundamental change in the operating governance of local authorities.
1. Any checks and balances should be on the processes of authorities rather checks on individual transactions due to limited central resource. This could include requiring councils to have a commercial property investment strategy before borrowing from the PWLB.
2. The controls CIPFA is seeking to enforce on councils seem driven by the actions of a few councils that have invested to high levels compared to their size. It is not clear if there is a risk-based objection to councils investing beyond their boundaries or economic area. Any decision to buy out of these areas could be subject to further risk assessments rather than impinging on sound financial decisions to create a balanced portfolio.