Editor’s note; There has been much in the news about the Spelthorne property portfolio, but many locals still don’t really understand the background. So local, Scott Wijayatilake, has done some investigation and has pulled together an overview.
We would like to point out that with a change in direction at Spelthorne Council recently we expect to see changes to this strategy moving forward.
Struggling councils up and down the country have, over the last few years, turned to commercial property investment as a source of income. Even in the good times, with the economy growing, this was a risky strategy. However, now they face a fall in rental incomes because of the pandemic, many are concerned about how to make up for this shortfall.
This can be traced back to the fallout of the 2008 financial crisis which, at the behest of former Chancellor George Osborne, ushered in an age of austerity and deep cuts to local budgets. Councils started to seek alternative sources of income and with access to cheap debt – interest rates were cut to 0.5% in 2009 – began investing in commercial property. By 2018, Spelthorne had constructed a property portfolio worth £1billion, dwarfing its £22 million budget for that fiscal year. The scale of recent purchases – see table below – means it has become ‘heavily reliant on investment income’ to fund local services and has left the council vulnerable to any sort of economic downturn.
In addition to this, as reported by the Bureau of Investigative Journalism in June, Spelthorne have agreed to let WeWork – one of its highest paying tenants – defer paying millions in rent because of the deleterious effects of the coronavirus. According to the Bureau, this amounts to a £4.5m loss in in-come for Spelthorne – more than a third of its ‘rainy day’ fund. Whilst its portfolio was predicted to bring in £9.9m this year, recent rent breaks surely put this figure in question, and so far, there has been no indication as to how this loss will be absorbed. Furthermore, when taking into account the cost of borrowing and maintaining the buildings, the return on investment is less than 1%. Subsequently, this could leave the council exposed to the very real possibility that more tenants demand rent breaks.
Moreover, Spelthorne’s recent £40m acquisi-tion of the Elmsleigh Centre in Staines-upon-Thames was driven by ‘a regeneration objective to protect the long-term prosperity of our town, not for investment purposes’. Due to the government mandated lockdown that came into effect on March 23rd 2020, 90% of its stores were closed. Retail property was already facing structural difficulties due to the rise of internet shopping. The Covid-19 pandemic has simply accelerated this trend which begs the question of whether the former councillors appreciated the risk of such an investment.
The Treasury appears to have taken notice of the risks that local authorities have taken on and is planning to crack down on councils making commercial property investments. An inquiry, due to finish at the end of July, proposed preventing them using government loans from the Public Works Loan Board (PWLB) to buy commercial assets to create a revenue stream.
Although this is clearly a positive move in reigning in officials with no real property experience, this ordeal raises the question, should a borough council covering some leafy Surrey villages have racked up £1 billion in debt without consulting its residents?
By Scott Wijayatilake