I understand the financial imperative for local authorities to seek investments that will provide (possibly) assured future income. But there is a point at which you have to ask whether using the Public Works Loan Board (PWLB) to invest in commercial property is either fair or the proper use of such borrowing:
Through this innovative partnership, local authorities borrow money from central Government via the Public Works Loan board at a fixed low interest rate and regenerate surplus land that they own by building a Travelodge hotel as either a stand-alone project or as part of a mixed-use development. Not only does this create jobs and boost the local economy but it also provides a substantial return of profit for the council.It looks great, doesn't it? After all the commercial interest (Travelodge in this case but it could be other businesses) gets access to cheaper finance than would be the case had they borrowed from normal commercial sources. And the Council gets that much vaunted 'regeneration' and an income from owning the freehold. It all seems like a brilliant idea but it does raise questions especially where the deal is less of a partnership that the one described here.
The first question is how local authorities with preferential borrowing rates and a benign tax environment are affecting the property market, especially for the sorts of investment - shopping malls, car parks, supermarket sites and so forth - that are favoured because of their (hopefully) reliable income. It may well be the case that the value of these assets is inflated by the capacity of local councils to invest larger sums given low interest rates on their borrowing.
The second question is whether the PWLB exists for the purpose of commercial property investment - especially the sort of investment Bradford Council has undertaken by simply buying an existing car park for several million quid. Surely the operation of the PWLB shouldn't be merely 'prudential' (does the ground rent exceed the cost of borrowing) but should contain some recognisable social value.
Finally, do local councils have the expertise to engage in this sort of property investment - what looks like low risk may turn out to be more problematic. Imagine buying up a freehold only to find that the income from ground rent dries up or becomes difficult to collect? Local councils are looking for long term income here without necessarily appreciating how market and social change will affect that long run - what happens to car parks in a world of self-drive cars? Do AirBnB type models undermine the budget hotel? And how will the medium term play out in the world of retail letting?
Councils will, of course, turn round and say, 'but we've no choice as we've no money'. This merely returns to the original driver of such investments - falling council revenue budgets - while the risks associated with such strategies are unclear and the impact on property markets elsewhere store up further problems. And this is all before we consider how many billions councils will add to public borrowing.
Should councils be doing this?