Government data released last week indicates commercial property investment by local authorities rose again last year, though it is unclear on whether the annual rate of increase is slowing.
The government does not require councils to separate out and submit official figures for capital purchases of commercial property.
However, the latest annual capital outturn and estimate figures, released last week, indicate councils increased their commercial activity, and their acquisition of land and buildings.
A senior sector source, speaking to Room 151 said: “It is difficult to get figures that prove it, but the latest set of data seem to indicate a rise in commercial property investment by councils.
You just can’t prove it definitively.”
Last week’s provisional outturn figures show council spending on acquiring land and buildings increased by 4.5% to reach £4.21bn in 2018/19.
David Green, strategic director at treasury adviser Arlingclose, said: “Another record year for both the purchase of land and buildings and new borrowing suggests that the acquisition of commercial property funded by debt continued unaffected by the Chartered Institute of Public Finance and Accountancy (CIPFA) and government disquiet at the practice.
“Announcements of further guidance and rumours of legislation to limit such activity might even be encouraging local authorities to rush to invest before it’s too late.”
Although the land and buildings category also covers non-commercial investments, some believe the data could indicate the first signs of a slowing of the trend of commercial property investment by councils – largely to produce revenue income.
This year’s rise of 4.5% was relatively modest compared to the jumps between 2016/17 and 2017/18 (43%) and the previous year (138%).
The anonymous source said: “It could be that all those who were going to have already got on the bandwagon. Possibly nobody else is going to.”
Last year, Martin Easton, head of capital and treasury at Birmingham City Council, warned that the current increase in borrowing cheaply to invest in commercial property was another “craze” sweeping the sector, and compared it to investment in Icelandic banks, LOBOs and interest rate swaps.
Another category within last week’s data on council capital spending gives another indication that the sector’s appetite for commercial spending on property might have peaked.
Capital expenditure on trading services fell from £2.9bn in 2017/18 to £2.5bn (provisional outturn figure) in the year to March this year.
The trading services category includes “the maintenance of direct labour and service organisations, such as civic halls, retail markets”, in addition to commercial activity.
However, it may be too early to make any conclusions about a trend in the area – figures show councils are forecasting a sharp rise in the trading services budget to £4.2bn in this financial year.
Spending in this category stood at just £323m in 2014/15.
Don Peebles, CIPFA head of policy and technical, said: “Commercial investments do not sit well with the primary purpose of local authorities, which is the delivery of quality services to local residents. CIPFA welcomes a slowdown in such investments.”
Local authorities are becoming more aware of the risks incumbent in the property market. However, there is still a way to go, which is why CIPFA will soon publish further guidance on commercial investments to help keep the sector on the right track.
Last year, Peebles hinted the guidance could clarify the definitions of “borrowing in advance of need” and “proportionality”.
