Spending watchdog demands review into councils’ ‘risky investments’ in commercial property

'Fourteen-fold increase in spend on commercial property raises serious alarm bells,' says chair of public accounts committee

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Official auditors have called for a review into the system that enables Britain’s cash-strapped councils to become exposed to financial risk by investing billions of pounds in commercial property.

In a new report, the National Audit Office (NAO) now estimates that local authorities spent £6.6bn buying property from 2016/17 to 2018/19 – a staggering 14.4 times more than in the preceding three years.

Sir Eric Pickles, during his tenure as communities secretary, urged councils across the country to become more entrepreneurial and many sought to build their property portfolios in an attempt to increase profits.

The spending watchdog said a key motive behind authorities’ recent acquisitions has been to generate rental income – offsetting cuts to their budgets from austerity measures over the last decade.

Between 2010 and 2020, the auditors added, real-terms reduction in local authorities’ spending power through both central government funding and council tax had fallen by over 28 per cent.

The NAO is now calling for the system to be reviewed by the Ministry of Housing, Communities and Local Government (MHCLG) – responsible for overseeing the wider local government finance system.

The report said: “Authorities face potential risks from buying commercial property, such as in the event of an economic recession or a downturn in a particular economic sector particularly where authorities are dependent on their rental income to keep up with the debt repayment or fund local services.

“The scale of spending and borrowing by some authorities in recent years leaves them potentially exposed to these risks.”

It added: “Given the recent increase in local authorities’ commercial activity, it [MHCLG] should review whether the current framework is still achieving its intended aims.”

The head of the NAO, Gareth Davies, said: “Local authorities have responded innovatively to the challenge of funding constraints, with some investing in commercial property to secure additional income.

“However, the benefits from this investment must be considered against the potential risks to authorities, particularly given the concentration of this activity and associated borrowing within a relatively small group of authorities.

“MHCLG needs to look again at the framework which governs local authority borrowing and investment and consider whether it is still fit for purpose.”

Meg Hillier, the chair of the Commons public accounts committee, added: “Given local authorities have faced such big cuts, it is understandable that many might take part in risky investments to get more money.

“However, a fourteen-fold increase in spend on commercial property raises serious alarm bells. Most of these acquisitions by value are being made by a small number of authorities, and activity is concentrated in the south-east.

“The department needs to take stock and ensure that there is protection for local taxpayers from local authorities acting as investment bankers.”

In response to the NAO report, a spokesperson for MHCLG said: “Next year, councils in England will have access to £49.2bn – the biggest annual real-terms increase in spending power in a decade – to deliver services for residents.

“Council are responsible for managing their finances and must properly consider the risks and opportunities when they make commercial decisions. We will carefully consider this report in our work as stewards of the local government finance system."