Society of District Council Treasurers president, Jill Penn, offers some practical guidance and the questions a council should ask before taking the plunge into direct property investment.
Many types of council either have or are considering purchasing property as a form of commercialisation but they all appear to be slightly different rather than having a clear, consistent approach.
What are the key issues all councils need to consider when going down the commercialisation route? This question was shared with some members of the Society of District Council Treasurers (SDCT) of which I am currently president (thanks must go to Adrian Rowbotham, chief finance officer of Sevenoaks District Council, who initially neatly laid out our thoughts to then enable me to expand on).
- The key questions SDCT consider you need to ask are: Why are you doing it? Are you clear and can you articulate it to your stakeholders? Is it income-generating to replace lost Revenue Support Grant (RSG) (many districts stopped receiving any RSG in 17/18 and 18/19), capital growth, economic development or a combination of these? Auditors will be very keen to know if this is a member whim or if there is an outcome-focused approach driven by a reasoned business case. Being clear about the reasons will also give one an understanding of the risk appetite needed to do it effectively. Will going down this route provide a genuine solution or is it just tinkering at the edges?
- What powers are you using? E.g. General power of competence. Do you understand the implications? As well as general powers of competence you could be using the Localism Act and other regulations or guidance. There are pros and cons to all of those, but my advice is to take legal counsel because using the wrong one can be very costly. By articulating what powers you are using, you know the boundaries you are working within and can ensure that the agenda cannot be challenged, thus preventing the roll-out of any project from being delayed or even stopped.
- Is there enough expertise in housing? If not, what external advice do you need? Property, legal, VAT, financial, treasury expertise could be needed, and should this come from public or private sector specialists?
- What is the elected members’ appetite and level of involvement like? The key criteria that needs to be agreed by members can be a mix of the total amount available, individual property limits, returns, asset categories, location, etc. If the commercialisation agenda is operating through a company, you need to consider whether members should be on the board or not. The member committee process is normally too slow to purchase a property, so how will it be signed off and what can be put in place to speed it up?
- How will you deal with changing guidance? Over the last few years the views of professional advisors (and external auditors) has changed regarding what and where you can buy. It’s important that the views of councils (e.g. through SDCT) are involved in the discussions regarding guidance to ensure that it is fit for purpose, from a practical perspective. Those at the coal face are the ones that have to deliver so let us be the judge of what will work and what will not. It would save a lot of time and energy.
- How will you fund it? Your choices include capital receipts, reserves, external borrowing (PWLB, MBA, or others) and internal borrowing (this highlights the importance of having good balance-sheet forecasting to calculate how much and for how long you can borrow). It is vitally important the treasury department or officers are involved throughout.
These questions are all great if you are a council of the size and resources such that the commercialisation agenda or regeneration is the next natural step. But what about those councils who are too small or in deprived areas and do not have the funds to embark on this journey? How can support be provided to those authorities? If they can get support and work with others, who bears the risk in such a situation?
All of these questions are worth asking. As S151’s we have to be comfortable with the answers and be independent in our consideration. However, with the funding envelope shrinking, what choice do we have but to look at new ways to deliver services and regenerate our local areas?
