Experts warn of council credit bubble

Dozens of councils across England are risking financial difficulties by relying too heavily on income from real estate, experts say. The total sums invested by local authorities over the last two years alone have reached £1.7 billion. Additionally, much of the capital used was raised through borrowing, sparking concerns of serious problems if the property market weakens

Covering shortfalls

These real estate purchases are thought to be a response to central government cutbacks, which have come at a time of rising costs, particularly in areas like social care. Observers have also suggested that councils have been encouraged by a change in funding policies, whereby the 50% of tax revenues that they can keep from businesses will increase to a full 100% from 2020 onwards.

These investments also are made possible by the Public Works Loan Board, which offers loans at rates as low as 2.5% – figures private entities can’t get. This reduces overheads in the long term, making it much easier to outbid property investors and still profit on returns. It could also encourage involvement in more high-risk ventures, as the costs of buying in aren’t as steep.

Spreading risk

The biggest worry, however, is that councils are concentrating themselves too heavily in a single area and may become reliant on it. This becomes a problem if the market collapses and the returns dry up.

Reports suggest that the investments have been primarily made in commercial property, particularly shopping centres, and in sizes that dwarf other schemes. Spelthorne Council, for example, has reportedly invested £380m in the local BP campus – a sum four times the value of all the council’s other assets combined.

Rather than betting on a single market, councils could consider diversifying their assets to take advantage of other booming business areas. It may also be wise to ensure that existing revenue streams, such as council tax and business rates, continue to be paid promptly and efficiently.

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