A briefing on local authorities' acquisition of multi-million pound commercial property portfolios, the advantages and risks, regulation, and commentary.Jump to full report >>
In the mid-2010s, some local authorities have sought to build up new portfolios of property in order, amongst other aims, to generate a profit from commercial lettings in order to increase their revenue budgets.
Many local authorities in the UK have long had sizeable property holdings and have been free to invest in property for purposes relating to their statutory duties and responsibilities. They may buy land and property both inside and outside their own areas. They are currently able to borrow money from the Public Works Loan Board (PWLB), or from other sources, at relatively low interest rates in order to invest in properties. Where the rental income from the properties exceeds the regular repayments on the loan, the authority may keep the difference and spend it on local services.
Borrowing and investment are matters of local government capital finance. Thus practice in this area is governed by CIPFA’s Prudential Code for local authority finance. In addition, local authorities must take account of CIPFA’s treasury management guidance for local authority funds, and the DCLG’s statutory guidance on local authority investments and minimum revenue provision (MRP). The DCLG launched a consultation on these two sets of statutory guidance in November 2017.
This briefing paper sets out the process and the legal background for local authority commercial property investment, notes recent media commentary, and presents some reported examples of large-scale commercial property activity. It notes some of the potential risks of this activity. It also notes some of the commentary, both positive and negative, on these initiatives from the sector and other actors. It also includes some details of previous episodes of local government financial innovations that are often quoted as ‘cautionary tales’ in the current context. These are the Hammersmith ‘interest rate swaps’ episode in the late 1980s; local authority investments in Icelandic banks in the late 2000s; and recent controversy over lender option, borrower option (LOBO) loans.
The bulk of the briefing paper therefore covers developments in England only, though brief details on the position in Scotland, Wales and Northern Ireland are included.
Additional information on local authority borrowing and capital finance management can be found in the Library briefing paper Local government in England: capital finance.
Commons Briefing papers CBP-8142
Author: Mark Sandford
Topic: Local government