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The Treasury is poised to ban local authorities from buying up investment property, after a near-£7bn spending spree in the past three years which has left councils exposed to struggling commercial real estate just as the sector faces a severe downturn.
Dozens of councils are facing scrutiny after tapping low-cost loans from central government to buy investment properties for rental income as a way to shield themselves from deep cuts to their budgets by central government over the past decade.
The practice has grown exponentially in recent years with local authorities spending £6.6bn on commercial property between 2017 and 2019.
That was a 14-fold increase on the three years prior to that, according to Meg Hillier, the chair of the public accounts committee.
Retail property was already facing structural difficulties because of the rise of internet shopping. In the last two months it has been dealt a further severe blow by the coronavirus lockdown, with many retailers refusing to pay their full rent.
Shares in Hammerson, one of the biggest listed retail property companies, have slumped from £3 to 63p since the start of the year.
Chancellor Rishi Sunak said in the Budget in March that the practice of councils tapping the Public Works Loan Board to finance property deals would be reviewed by the Treasury as part of a broader consultation on the role of the quango that provides loans to public bodies.
A Treasury spokesman said on Wednesday that although the consultation would not finish until July, the government wanted councils to end the practice. “Our starting point is that local authorities should invest public money in regeneration, housing and delivering services, not in speculative commercial investments which can put local and national taxpayers at risk.”
Most of the deals have been carried out by 49 councils, according to the National Audit Office, with Spelthorne borough council in Surrey building up a £1bn property portfolio.
The National Audit Office warned in February that the practice had left councils exposed to “in the event of an economic recession or a downturn in a particular economic sector.”
The government spending watchdog said total external debt held by councils increased by £14.3bn between March 2016 and March 2019.
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Will Garton, director of national services at the Treasury, told a PAC hearing last Friday, that the proposed ban would mean councils “will simply not be able to go and purchase a shopping centre and have access to the PWLB.”
He said the Chartered Institute of Public Finance and Accountancy had made it clear “that they would like local authorities to behave as if the consultation is being implemented as proposed until they hear otherwise.”
Sir Geoffrey Clifton-Brown, a Tory MP on the PAC, described the Treasury’s consultation as “like bolting the stable door after the horse has bolted.”
Jeremy Pocklington, the newly-appointed permanent secretary for the Ministry of Housing, Communities and Local Government, told the PAC that the existing prudential framework which governs local council borrowing did not provide a binding restraint on such investments.