Slough Borough Council is trying to sell commercial property assets worth £600m after its property investment spree went horribly wrong. The move is part of a rescue plan imposed on it by Government ministers.
The local authority is not the only council to have invested in commercial property, and now feeling the pinch. With interest rates at rock bottom, councillors saw an easy and quick fix to their cash flow problems: income-producing commercial property investments.
Lucrative deals turned sour
The trouble is that many of these investments were made outside of Borough Councillors’ and council staffs’ circle of competence, and with a rapidly declining High Street, coupled with the Covid pandemic, many of these seemingly lucrative deals have turned sour. Tenants went bust, properties came empty, and what had been cash cows have turned into cash guzzling liabilities.
Local authority investment in commercial property is now under the spotlight from central Government following these sorts of outcomes. The Treasury is looking at restricting the use of The Public Works Loan Board, stopping lending to local authorities borrowing money for commercial property investments.
The effectively bankrupt Slough Council is now overseen by Government-appointed commissioners and is being forced to implement a three-year recovery plan
Following the central Government intervention, Slough’s council leaders now say they need over £100m of outside financial support in the financial years 2021-22, a figure which is far higher than their initial estimate of £15m.
The borough is said to have invested £96m betting on commercial property providing them with a steady cash flow of income. That was before Covid hit and some of their investments turned sour. A cinema in Basingstoke is a prime example of one of the hardest hit during the pandemic, with their superstores in Gosport and Wolverhampton probably fairing little better.
Commercial investments for sale
Slough Council is now trying to dispose of around one-half of its £1.2bn commercial property estate, after Government ministers have criticised the council’s leadership for “deeply concerning” mismanagement of its finances.
Slough’s problems are potentially the tip of the iceberg for central Government. These types of commercial investments by councils have been part of an upward trend, and many are likely to cause Government to have to step in to oversee other councils as the pandemic affects their investments and their already tight budgets.
Rob Whiteman, chief executive of the Chartered Institute of Public Finance and Accountancy that carried out a review of Slough’s finances for the Government, has said:
“If we do see any more councils in that position. I think it’s going to be a handful rather than a significant number.
“The decision of the Secretary of State to intervene is really a culmination of several years of mismanagement rather than Covid. Covid may have accelerated their position.”
Councils went on a spending spree
English councils are said to have spent around £6.6bn of their taxpayers’ money buying commercial property over the three years to 2018-19, that’s according to the Public Accounts Committee.
There are now substantiated fears that this spending spree could turn nasty because commercial property asset prices have in some cases lost as much as 50 per cent of their pre-Covid values. The shift towards online shopping and home working during lockdowns tipped many tenants over the edge, cutting these council landlords’ cash-flows off at the source. Not only that, empty commercial buildings quickly switch from an asset to a liability.
Along with nine other councils, Slough was in receipt of £15m after Covid hit as part of Whitehall’s rescue plan to help struggling councils. But in Slough’s case, it was not enough. It quickly and effectively declared itself bankrupt in July after discovering an even bigger black hole in its finances.
The intervention now under Michael Gove’s remit, the local government secretary, is to give Government commissioners the power to override a council’s financial management and strategic decisions if its leaders fail to deliver on a supervised improvement plan.
Kemi Badenoch, a minister in Mr Gove’s department, has said of Slough council that damning reports into how the council is run “paint a deeply concerning picture of mismanagement, of a breakdown in scrutiny and accountability, and of a dysfunctional culture”.
“The council’s contract management is weak and has resulted in rushed procurement, missed exit opportunities, and has delivered poor value for money. There is little evidence that the Council understands the entirety of its commercial investments and their impact on its finances,” she commented.
Ms Badenoch told The Daily Telegraph that the review concluded that Slough “cannot become financially self-sustaining without considerable government support. The council cannot demonstrate a track record of making difficult decisions or of taking decisive action to bring about improvements.”
James Swindlehurst, the Labour leader of Slough council, has said: “There are still many difficult decisions ahead of us. We are financially in a very challenging place, and we will be asking government for a level of capitalisation direction which has never before been made by a local authority.
“I accept the Government intervention; understand why they feel it is necessary and I look forward to welcoming the commissioners to Slough and working with them.”