Croydon and other local authorities’ questionable investments in commercial property are about to be scrutinised by Parliament’s spending watchdog, as the Conservative government wises up to some of the dodgier “investments” by councils in their attempts to balance their books.
The Chancellor of the Exchequer announced in his Budget last month that the government intended to tighten up restrictions on what money from the low-interest Public Works Loan Board is used for by councils, and now the Public Accounts Committee is to investigate into purchases of commercial property by local authorities.
This comes at a time when there are well-founded fears that the coronavirus pandemic will expose councils to a sudden fall in income from their investments.
High on the PAC agenda will be “whether local government officials have the commercial skills required for such transactions”.
According to a report in the Grauniad, “Local authorities have been on a shopping spree in recent years, buying up property such as shopping centres and office buildings as a means of increasing their revenues and to offset the impact of austerity measures introduced in 2010.”
According to a report from the National Audit Office, local authorities spent an estimated £6.6billion on commercial property between 2016-2017 and 2018-2019. That was up from £460million during the preceding three years.
And Croydon Council, under the leadership of Tony Newman, together with his cabinet member for finance, Simon Hall, ably aided by chief exec Jo “We’re Not Stupid” Negrini, have been enthusiastic spenders of public money, despite their complete lack of any commercial property experience.
Croydon Council has made no announcement about whether their tenant businesses in the Colonnades leisure centre on the Purley Way have been offered rent holidays during the covid-19 lockdown, which has seen many businesses have to close to maintain social distancing for their staff and customers.
This investment followed the council buying the Croydon Park Hotel earlier in 2018 for £29.8million – nearly £5million more than the asking price.
Since then, the council has splashed the cash – another £14million of public money – to buy up builders’ merchants Selco on Imperial Way and medical supplies specialist Alliance Healthcare in New Addington, in deals signed off at the end of 2019.
The council is currently able to borrow millions of pounds from the government-run Public Works Loan Board, and they think that by owning the freehold and charging commercial rents, they can generate income towards the cost of providing services.
Last August, in announcing the completion of the second part of the purchase of the Colonnades site, the council revealed that the deal is “generating more than £150,000 a year in additional income for frontline services…
“… The entire site is providing an annual income of around £1.4million net of interest and other costs, which will help protect council services for residents.”
Note the party line of “protecting council services”.
And that was before covid-19.
Now, even this avenue of fund-raising seems likely to dry up, as Whitehall worries about local authority officials trying to swim with the sharks of the commercial property market.
“Yet again with Croydon, it is the economics of the casino,” a Katharine Street source said today. “It’s just that they are gambling with public money in an area of finance over which they have very little expertise or track record.
“You can imagine Negrini or Hall getting some cheap kick, some frisson of excitement when they pull off these deals, but really..? Any fool can pay over the odds for a run-down asset that doesn’t deliver the returns you might have hoped for.”
Even before the government lockdown created uncertainty about local authorities’ income, the NAO report warned of the risks associated with commercial property, which could leave councils badly exposed by a recession or property crash.
“Income from commercial property is uncertain over the long-term and authorities may be taking on high levels of long-term debt with associated debt costs,” the NAO report states.
Fears over councils’ property investments are being replicated across the continent. Analysis from the real estate consultancy Green Street Advisors says that commercial property across Europe will “experience occupancy declines and rent declines in 2020 and 2021”.
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