A recent trend for hard-pressed local councils to supplement their income by borrowing to invest in commercial property could be a dangerous short-term fix warns central government.
The Treasury is attempting to steer local authorities away from this strategy, some of which have purchased retail premises occupied by struggling high street businesses. The result, thinks the Treasury, could be councils being forced into bankruptcy.
Fall-out from High Street businesses going bust, creating high vacancy rates in many towns, results in rapidly falling local property values. Last week interest rates from the Public Works Loan Board were increased by one percent last week to reflect the increased risk, the Sunday Telegraph reported.
As interest rates rise, the cost of borrowing for local authorities could skyrocket, while potential loss of income from long-term vacancies could jeopardised the solvency of many a local council.
In the face of struggling retail centres some councils have been snapping-up shopping centres – five have been sold to councils since 2016, while property companies have been exiting the sector. Whilst these councils may have experienced a welcome initial income yield, this often proves short-term; prices are low for a reason, and property investing expertise is often lacking.
A recent deal involved Hammerson offloading the St Oswald’s retail park in Gloucester to the local council for £54m as the leading property company continued its own strategy of dumping retail shopping centres. Likewise, Mole Valley district council in Surrey bought an Asda site in South Wales for £11.5m, according to reports by The Sunday Telegraph.
Large property companies are experiencing a torrid time in retail, with values collapsing as more retailers go to the wall: Hammerson, British Land and Intu have all seen their portfolio valuations and profits decimated as their retail tenants close stores, seek rent reductions or trigger controversial company voluntary arrangements (CVAs) to rationalise and restructure.