The Isle of Wight Council recently became the latest local authority to enter the commercial property development market. It has invested a sum of around £100m, following a growing trend in England for government entities to acquire rental portfolios. In fact, private-sector fund managers report being increasingly outbid by councils, in a situation not dissimilar to that of the 1980s real estate bubble in Japan and China.
Commercial and residential property development
Alongside a Regeneration Directorate, the Isle of Wight is aiming to transform the financial position of its council and drive an increased annual income of over £15m – while creating 12,000 new jobs in ten years. The fiscal demands of the Regeneration Directorate have led the Council to make the decision to invest in property via a carry trade.
A carry trade is a form of arbitrage that permits local authorities to borrow at lower rates than those of their private sector counterparts, further permitting them to invest in properties that offer them a higher yield. The Financial Times estimates that money ‘borrowed at 2.5% or so is typically going into property yielding 6-8% or more’.
Funding cuts and budget gaps
Behind this strategy, however, lie years of funding cuts from the UK governments. Budget gaps are emerging and the Isle of Wight is heavily pushing reform programmes, which include a 20-year growth plan and a strategy to retain assets while investing to ensure maximum value and return.
In this hedge-fund style of investment the financing stems primarily from the public sector. Flexible funding is available from the Public Works Loan Board, an organisation that has financed capital spending since 1793.
While the Isle of Wight focuses on both commercial and residential property investments, other local councils in the UK have concentrated on investing in their shopping centres. Stockport Borough Council bought the Merseyway Shopping Centre in the town for £75m, and Surrey Heath Borough Council last year spent £86m on The Mall in Camberley.
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