A local authority has decided to increase its commercial property budget by 50% due to falling yields which it claims are a result of greater market competition from other councils.
Bracknell Forest Council has decided to make £30m of capital available for further purchases after its became clear that its original £60m strategy, agreed last year, would not reach its targeted return.
The council needs to make £1m a year, rising to £3m by 2019/20, to meet commitments made in is transformation programme for service provision.
However, Peter Heydon, executive member for finance and transformation at the council, said: “There is some evidence that the number of local authorities seeking property in the local market is pushing the price of property up. It has become a sellers market — there are plenty of people with money looking to buy.
“Because the price has gone up the yield comes down.”
It is understood that the council was recently priced out of one property purchase by another authority from within South East England.
However, Alistair Parker, development partner at property adviser Cushman & Wakefield, cast some doubt on the price effect of competition among councils for property assets.
“I don’t believe local authorities are driving up pricing for prime assets as the yields on those are frequently below the net 5%+ comfort zone that PWLB conventional financing supports,” he said.
“The competition for higher yielding assets is more variable and, in some areas, authorities are getting aggressive in their pricing.”
Bracknell’s “low risk” property strategy targets properties with a yield of 5% net of fees and interest.
“Anything above that starts to get too risky and speculative,” according to Heydon.
Four properties purchased under the council’s property investment strategy, worth a total of £58.6m, are set to provide an average net yield of 3.63%, rising in five years to 4.35%.
This, however, is below the original assumed annual net return of 5% — income which has already been allocated for spending on services.
A report by council officers, agreed last month, said that failing to increase the budget for commercial property by £30m could threaten service provision.
It said: “The executive could decide that the level of investment already approved, at £60m, should represent the ceiling for commercial property acquisitions.
“The consequence of this would be the need for alternative savings to be identified in order to achieve a balanced medium-term financial position.”
He added that open market pricing would regulate any increased demand, with values rising until demand drops off.
A statement from Bracknell Forest Council said: “We always strenuously vet any property that we are considering, the figures must stack up and the risk must be minimised — we will always reject properties that do not meet our strict criteria.”
