Briefing: Local Authority Property Investment



Local Authorities have been investing increasingly in commercial property in recent years. As specialist property legal advisors to Local Government, DJB have produced this briefing note on this increasingly important topic.

Local Authority investment in commercial property has increased dramatically in recent years. In 2016 alone, local authorities acquired over £1.3 billion of commercial property, more than the total value acquired between 2008 and 2015. Acquisitions of office and retail premises made up the vast majority of this figure. Some notable purchases include Leeds City Council’s £44 million purchase of Addleshaw Goddard’s HQ at 3 Sovereign Square, Surrey Heath Borough Council’s £86 million purchase of The Mall in Camberley and Spelthorne Borough Council’s record-breaking £340 million acquisition of BP’s business and technology campus in Sunbury-on-Thames.

There are a range of factors behind this increased volume of investment acquisitions. Firstly, funding pressure from Central Government has forced Councils to explore alternative revenue streams. Secondly, low interest rates have meant that Councils can obtain funding at a low cost through the Public Works Loan Board with which to fund the acquisitions. Finally, the uncertainty of institutional investors surrounding Brexit has provided an opportunity for Councils, with shopping centre investment, in particular, dropping by 39% in the first quarter of 2016 and remaining depressed into Q3 2017.

There are a number of benefits for Local Authorities from investing in commercial property. Investment in commercial property, in particular in retail property, has been seen as an attractive way to regenerate an Authority’s Local area while developing alternative revenue streams, 85% of acquisitions in 2016 being within an Authority’s local area. Purchases outside the local area can also generate increased returns that can fund local services.

The Public Works Loan Board continues to provide funds on attractive borrowing terms to Local Authorities, providing £3.6 billion in funding last year at interest rates below 3%. Private funding can also be a viable option. Warrington Borough Council’s investment company, Warrington & Co, at one point gained access to an A** credit rating, though this has since been downgraded. This was higher than China or any European Bank, allowing for interest rates as low as 1.5%. Investment in commercial property with higher yields can, therefore, provide an attractive revenue stream for Councils.

There has been some criticism of the risk involved in investing public funds into investment assets, especially where the investments are paid for by borrowings that are multiple times the value of a Council’s total assets. Some commenters have raised concerns that overborrowing combined with lack of investment expertise could cause considerable problems for Councils which are not conscious of these risks.

Furthermore, DCLG has recently concluded a consultation proposing changes to the regulations surrounding Local Government investments. Concerns have been raised by the Local Government Association (LGA) that the proposed changes could negatively affect Local Authorities’ ability to invest in yield bearing opportunities and would therefore restrict their ability to invest in property. The LGA was particularly opposed to the changes being applied retrospectively, in which case Councils could be forced to sell off previous purchases. The outcome of the consultation will be awaited with great interest.

About Our Experience

DJB has advised Local Authorities on numerous investment property transactions. Our lawyers are all experienced specialists with a track record of delivering quality advice to the tight deadlines involved in investment acquisitions. Our team’s experience in working for Local Government and private investors also means that we can bring an understanding of both sectors to any matter we advise on.

If you any questions or queries relating to this article, please get in touch with Sue McCormick at Sue.McCormick@djblaw.co.uk.

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