The rhythmic bleep at the tills charts a steady trickle of shoppers flowing through the checkout area at Asda in Ystalyfera, south Wales. It is a typical mid-morning at the supermarket in this former industrial town, 12 miles north of Swansea. Young mothers browse the knitwear section at George by Asda; a couple of older men in paint-speckled work overalls scour the sandwich section for their lunch.
It looks much like every other Asda in the country. But this site is owned by Mole Valley district council – in Dorking, Surrey. The council bought it for £11.5m and receives an annual rental income of £599,450. Asda has a lease with the council until 2037.
The proceeds from Asda – “saving you money every day” – are used to pay for key council services, such as bin collection and community and leisure centres, 200 miles away.
Dave Keane, a retired police officer shopping at the supermarket, said: “I would prefer it to be owned by the local council, Neath Port Talbot. I pay £250 a month council tax … so I feel a little bit aggrieved by that.”
Councils across England are under huge pressure to adopt a more expansive investment strategy, as their funding from central government is slashed. Many have responded by loading up with debt to play the property market, exposing some to a ticking timebomb of high borrowings and the nascent threat of a property-market collapse.
The omens are not good for retail landlords. Last week the real estate adviser Altus Group forecast that 23,000 shops would close in the UK this year – with a loss of 175,000 jobs – while the Royal Institution of Chartered Surveyors (Rics) told valuers to be “aware of the potential for significant changes in value” in retail properties. Last month fund manager Fidelity International warned that UK retail properties could lose up to 70% in value as a result of rent cuts. The correction would be driven in part by a 10-40% reduction in rents to make them affordable for bricks-and-mortar retailers, Fidelity said.
The Local Government Chronicle (LGC) said the amount spent by councils in England on investment properties ballooned from £76.4m in 2014-15 to £1.8bn in 2017-18. These include offices, hotels, supermarkets and gyms, sometimes miles outside a council’s own area: these out-of-area investments are worth £619m alone.
Lord Oakeshott, chairman of Olim Property, which manages commercial property portfolios for institutional clients, said: “The whole thing is a mess. Councils are being loaned vast amounts of money by government, which is being invested in property. It’s a hell of a gamble that these councils are taking and this is not what councils should be doing.”
If the economy does take a turn for the worse, councils may find their current roster of reliable tenants forced to take evasive action. Store and office closures are a common cure when companies begin to feel the squeeze. A deepening economic crisis and a soaring debt pile makes for a toxic financial cocktail that some “casino councils” may be forced to swallow. Authorities will be forced to find new tenants who might not be able to pay the same levels of rent – if they can find new tenants, that is.
Spelthorne borough council in Surrey is most exposed to the commercial property sector after ploughing headlong into a buying spree that has seen it hoover up properties worth almost £1bn, including the £358m purchase in 2016 of BP’s Sunbury-on-Thames campus.
The council, based in Staines-upon-Thames, has the 15th smallest budget in England. It has borrowed £1bn from the Public Works Loan Board, an agency of the Treasury, to fund its investment activity.
The Chartered Institute of Public Finance and Accountancy (Cipfa) has warned councils not to expose public funds to “unnecessary or unquantified risk” when borrowing to invest in commercial property.
“Where the scale of commercial investments including property are not proportionate to the resources of the authority, this is unlikely to be consistent with the requirements of [the Cipfa prudential code],” it said.
Alongside Spelthorne, three other councils – Woking, Runnymede and Eastleigh – have borrowed more than 10 times their net revenue to finance property deals, according to the LGC.
Spelthorne said it generated £50m a year from its investments and that its portfolio had risen in value by £11m. “Our proven property investment strategy is significantly supporting the services we provide to our residents. Since the implementation of this strategy there have been no cuts to services or call on reserves, no disposal of capital assets or above-inflation council tax increases.”
But with Brexit looming the property sector is particularly vulnerable. The Bank of England has warned that “disorderly” Brexit – where Britain crashes out of the EU without a deal – could make the price of offices, warehouses, shopping centres and hotels drop by as much as 48%– more than the 42% peak-to-trough decline following the 2008 crisis. Even with only a “disruptive” Brexit – where the UK retains access to some trade agreements between the EU and other countries – the Bank suggested property prices could still fall 27%.
Robert Evans, Spelthorne’s Labour councillor for Surrey county council, said: “These casino councils are playing property roulette with taxpayers’ money. I’m surprised the government allows a small council to borrow so much. Playing the property market is not what people see as the role of a local council.”
However, the Local Government Association said councils had little choice but to look for “alternative” sources of funding, because the gap between the money local authorities received and what they needed was estimated to rise to £7.8bn by 2025.
Mole Valley said the reduction in its government grant from 2016-17 onwards had left a hole in its budget. The council last year proposed an increase of capital expenditure of £48m to £100m, to be financed by borrowing, while interest rates were low. These funds will be invested in “appropriate property assets with a view to generating additional net income of £1.35m per annum by 2020”. It has six properties in its portfolio, but the Ystalyfera Asda is the only “out of area” retailer.
Simon Edge, cabinet member for prosperity at Mole Valley, backed the strategy of buying assets to fund services. “We are confident that this purchase [Asda] was the right property at the right price and represents value for money for taxpayers,” he said. “By 2020 further reductions in government funding may mean that Mole Valley needs to become entirely self-funding.
“We are confident in our investment’s future prospects. Our purchase has a long, contractually binding lease until 2037, giving us 18 years of further income.”
Mandy James, owner of the Junction Cafe opposite Asda, and her colleague Beverley Rayne believed it was income that should stay in the area. “My partner works for Neath Port Talbot council and they are struggling because of budget cuts,” James said. “The rent paid by Asda should come into this community, because we are the ones who shop there,” Rayne added.
Instead the beneficiary is another council also seeking funds – nearly 200 miles away.
Most exposed
Biggest council investors in property, 2014-15 to 2017-18
Spelthorne £654.9m*
Runnymede £356.4m
Surrey £268.3m
Kingston £163.8m
Torbay £96.8m
Newham £91.5m
Bucks £79.2m
Leeds £76.3m
Eastleigh £68.7m
*An additional £285m has since been invested
Source: Local Government Chronicle
