A Means to an End - Local Authority Property Investment in the UK

06-04-2018

By Tim Reade, Head of Property Advisory Services, CIPFA

In recent years, commercial property investment by local authorities in England has grown exponentially. However, the same cannot be said for authorities in the devolved nations. What are the reasons for this increased investment activity in England and why is it not happening across the rest of the UK?

Common to all UK nations is the need to have regard to the Prudential Framework. The recently updated CIPFA Prudential and Treasury Management Codes call for more robust management of commercial activity and capital borrowing. Local authorities must now articulate long term plans for capital expenditure and investments via a capital strategy. Consideration of both risk and reward is key, indeed a clear statement of an authority’s appetite for investment risk is required, as are stronger linkages to asset management planning and a strategic approach to property.

In February 2018, the Ministry of Communities, Housing and Local Government (MCHLG) directed English local authorities to prepare at least one investment strategy for each financial year, to be made publicly available and approved by the whole council.

This guidance is commonly seen as a response to the increase in English local authority investment activity, as well as an attempt to bring clarity to the grey areas that exist around the legalities of investing outside an authority’s boundary. 

The above context does not, however, provide insight into the motivations of English authorities seeking to invest in property. The increase is, in our opinion, primarily driven by a need to respond to central government funding reductions. It is clear to us, as we tour the UK speaking to property and finance officers, that those English authorities with a more developed understanding of the risks involved in property investment, as well as the consequential returns, when combined with progressive and effective leadership at the right levels, have been best placed to capitalise on the cheap money available via sources such as the Public Works Loans Board (PWLB) to tackle this funding issue. Where the imperative to source income streams to combat the reduction in government funding is strong enough, those councils that recruit the right people (with the right skills) and inculcate the right culture, invariably find ways and means to bridge the funding gap. 

In Wales, unlike in England, at present authorities lack the benefit of the ‘general power of competence’ conferred by the Localism Act 2011. This is due to change with the Welsh government noting an intention to legislate to confer ‘general competence’ powers in their newly published Green Paper on Local Government Reform. We do not, however, believe this to have been a valid reason to explain the much reduced appetite to commercial property investment. The majority of English local authority property investors actually use the 1972 and 2003 Acts as their power to support property investment activity. It is our belief, that the most likely reason for this divergence in activity is the reduced pressure on Welsh local authority funding. 

In Scotland, as in Wales, there is less pressure on local authority revenue budgets from Scottish Government. In addition, there is a general view that there is still scope for more revenue savings, and so perhaps making savings appeals more than revenue generation to what are often regarded as risk averse organisations.

In Northern Ireland we have detected no commercial property acquisition activity. Our belief is that this is down to a combination of the ‘boom and bust’ in the property market in recent times, financial protection from the Northern Ireland Assembly and perhaps a link to recent local government reform. 

And so a mixed picture exists across the UK! However, one thing in all this is certain, and that is that those organisations who make it their priority to recruit well, lead effectively and promote the right culture, will be best placed to take advantage of opportunities that arise in commercial property investment markets.

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