Business Week: Bubble gold rush – Councils’ business is big business

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Faced with significant budget cuts from government and little wiggle room to increase taxes, local councils are now spending (and borrowing very cheaply) millions to snap up properties across Lincolnshire and surrounding counties to top up their coffers. Dubbed as an investment in their local communities, councils are hoping to make enough money to free themselves from central government, but it’s unclear how local businesses will reap benefits too — and some are claiming they’re just contributing to a credit bubble.

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The City of Lincoln Council made three bold moves in 2018 in a bid to generate revenue outside of council tax and business rates, a big part of which it doesn’t get to keep (for now). First, it bought a hotel building in the city centre for £13 million, which it will lease to Travelodge for 25 years. The building is being developed by York-based S Harrison, which previously bought the land from the council for £1 million.

The money was borrowed from the government’s Public Works Loan Board at much cheaper rates than what’s usually available for the private sector, meaning councils can expect a return of 8% to 11% on money loaned at 2.5%.

Then Luton-based Chariot Investment Holdings scored £6.6 million after it sold two car parks to the city council, which is now leasing them back to the company. And thirdly, housing developers will sell 172 new homes across the city to the council, who will be utilising them as social housing in a bid to free up some of its existing stock.

Across Lincolnshire, West Lindsey District Council allocated £30 million for property investments, and £13 million has already been spent. Controversially, the first three investments were outside the county: a Travelodge hotel in Keighley bought for £2.35 million is hoped to bring a £90,000 yearly return, while two business units in Sheffield (a gym and a lingerie factory) set the council back £5 million.

Councillor Giles McNeill said “we’ve made investments of just shy of £8 million and are generating a return of £598,000 per annum (7.58%), far better than the return of 0.43% we were earning on our investments in 2012.” Later in August, WLDC also spent £6.1 million locally on an industrial unit in Gainsborough.

The leader of South Holland District Council says it’s possible his authority could become a ‘free council’ and throw off the shackles of government control. Councillor Gary Porter said that authorities were unlikely to return to the level of services they used to provide for 30 years. “As soon they stop giving us money they can stop telling us what to do,” he said.

For similar reasons Boston Borough Council is taking a joint £20 million loan with East Lindsey District Council. Councillor Aaron Spencer has been buoyed by the success of a £1 million property fund investment made three years ago, which this March returned £1.111 million – giving the council an additional £111,000 capital. North East Lincolnshire Council also has a spending pot of £6.1 million to invest in properties around the region.

Lincolnshire County Council is setting up its own holding company too, Lincolnshire Future Ltd, which will have subsidiaries for purposes such as property, waste and investment. Having one of the most significant budgets in the region, LCC would be able to borrow much larger sums to invest than any of the districts.

“We’re not really in the business of buying stuff like shopping centres [like Surrey Heath council]; if we do invest, then we will where we can see a benefit for Lincolnshire,” said council leader Martin Hill. Instead, LCC is looking to trade and raise income from authority-run services, but the plans are yet to be finalised.

It’s no wonder fund mangers outbid by councils have been telling the Financial Times that councils are building a credit bubble. Overall across the UK, councils invested £2.7 billion from 2015 to 2017 in property acquisition thanks to the below-market rate loans from the Public Works Loan Board, according to an investigation by The Times — so in some ways, Lincolnshire councils are just catching up on the strategy. Historically, local authorities played an important role as commissioners, investors and guarantors, but it’s unclear how a primarily commercial investment focus will support the local economy in the years to come.

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