Saturday, 16 December 2017

Should Council's be doing this?

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?



The Stigler said...

No, terrible idea. If someone won't give Travelodge a cheap loan, it's because they've figured out the risk and that's the price. The council is subsidising Travelodge or at least, carrying some of their risk.

It creates jobs? So does leaving money in people's pockets to buy smart watches, ice creams or underpants.

And where I'm particularly sceptical about this story is that hotels are at the end of supply chains. No-one comes to a hotel because you build one. They come to hotels because they work somewhere or are going on a social trip. I'm sceptical about things like subsidising arts or sports, but there's undoubtedly some effects in terms of people using shops, restaurants and hotels who are coming to the event. All this will do is lower hotel room prices overall, or drive hotels out of business (maybe this one, maybe another) at the cost to the taxpayer.

Anonymous said...

Governments used to fund councils to cover most of the cost of the important services they deliver, eg elderly social care, kids in care, bins, libraries, museums, gritting. This government chooses not to provide that funding. It doesn't believe in that kind of collectively funded social state; it strives for an americanised model. So the irony of councils then being criticised for trying to make the best of that flawed model by using the very markets that the government so religiously believes in. What are they supposed to do? As we're seeing with the desperately failing care home market, choosing not to properly fund quite important stuff is a false economy which results in joe public actually paying more and getting less.

Anonymous said...

It's always possible that the council-funded Travelodge will offer special rates to councillors for their 'cinque a sept' as the French would have it.
Which may go some way to explaining the councillors' enthusiasm for the project. Can't wait to see their declarations of interest.

John Moss said...

No exactly "public works".

We have a housing subsidiary company now which can generate higher returns from affordable rented homes outside the HRA, (the formal Housing Revenue Account where Council home rents go), so why are we out-bidding more experienced investors in a market Councils know little about and ending up with lower returns?

John Moss said...

Oh and Travelodge will be paying a commercial rent, so it isn't them who get access to cheap finance!

Anonymous said...

Councils do NOT have the expertise!