Disquiet at UK local authorities’ growing real-estate exposure

From Euromoney:

UK councils are investing in commercial real estate in an attempt to plug their budget gaps, driven by cheap borrowing from central government. It could spell trouble for the sector…

Sounds good to me. Assuming that local councils own land and buildings in their own areas, this is just about the optimum source of finance for them, it’s like 100% Land Value Tax, or Business Rates without the downsides.

The interests of council and commercial tenants are aligned – both want safer neighbourhoods, thriving local economy, optimal development of local sites, good road and public transport access etc. It could also make things easier – there is no need for separate Business Rates assessments and charges for collecting business waste, the council can just charge an all-inclusive rent and have done with it. The tenant is only paying for what he gets and rents are set by market forces.

Private businesses can get on with what they do best: doing, making, buying and selling stuff, and councils can get on with what they do best (or least badly): owning and managing land usage. Assuming that councils hold land and buildings for the very long term, it takes all the speculative froth away, all they want to do is maximise the surplus of rents over costs.

If councils are taking a punt by buying up commercial premises elsewhere in the country, this is not so good, but hey.

Local authorities have always raised money commercially, but their track record is not stellar. Some 127 UK local authorities had £954 million invested in Icelandic banks when they collapsed – although most of this was eventually recovered…

Jeez. Putting money into foreign banks to chase high rates is the opposite of borrowing money at a low rates to be able to tap into local land values.

[Spelthorne] county council director of finance… points out that “local authorities have been commercial for a very long time with few failures.”

Exactly. It’s like social housing, which is not a big earner, but it’s nigh impossible to lose money.