Crackdown Faced by Councils Playing the Property Market

Amid increasing Government concern that bad investments could trigger a funding emergency for local services, councils are preparing for a Budget crackdown regarding their exploits in the commercial property market.

The Chancellor is expected to reveal tough new rules on council funding in November. Whitehall officials worry that attempts by councils to strengthen their income by smashing borrowed millions into shopping centres and office developments have placed their finances at risk.

A decrease in property values could push stretched local authority balance sheets into crisis.

Councils have been attracted to the commercial property market in recent years to substitute funding lost to cuts. They can borrow from the Public Works Loan Board (PWLB) at low rates of interest which is currently about 2pc, using the money to acquire property with a yield of 5pc or 6pc.

The PWLB, which is part of the Treasury, does require authorities to show that their investment plans are prudent, sustainable, and affordable. However, it does not demand that equity is put into deals by councils. As a result, spending on commercial property by authorities last year topped £1bn for the first time.

In 2016, Spelthorne Borough Council bought the International Centre for Business of BP at its campus in Sunbury-on-Thames for about £350m. The Local Government Association said that the deals were an essential way to bridge an increasing funding gap.