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UK councils have been buying shopping centres: what could go wrong?

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Shaun Richards 1/9/17

'The Private Finance Initiative

If we look at PFI the concept of cheap finance due to the UK’s ability to borrow cheaply vanishes like a Klingon Warbird with a cloaking device. From the Centre for Health and the Public Interest.

There are currently 125 PFI contracts with private companies overseen by the Department of Health. The capital value of the assets which have been built is £12.4bn. However, over the course of the life of the contracts, the NHS will pay in the region of £80.8bn to PFI companies for the use of these assets.

Now we see that we are letting council’s borrow much more cheaply to “invest” in commercial property. So this is more of a priority than national health or defence? For a start should they not be using such funds for social housing which might help quite a few problems in one go?

 

Money Week 7/5/17

'What’s been happening?

Over the past two years, dozens of local authorities in England have gone on an unprecedented debt-fuelled spending spree, buying up around £1.7bn worth of commercial property assets – shopping centres, office blocks and so on – using cheap loans from an obscure Treasury offshoot known as the Public Works Loan Board. The PWLB has been around since 1793 (though is shortly to be abolished and its functions formally swallowed up by its parent, the UK Debt Management Office). The Board’s job is to help finance capital spending and infrastructure investments by local government. So far, so uncontroversial. What’s got observers worried is that so many councils have been using cheap PWLB loans (which track UK government debt, and are currently very cheap) not to build things, but to invest in commercial property assets that yield far more than the interest rate needed to buy them.

What’s their motivation?

Turning a profit in order to plug the gap in their central government funding (there was a 37% real-terms cut in funding between 2010 and 2015) and allow them to carry on providing essential services. It’s not surprising the commercial property opportunity looks attractive. The interest-rate charges by the PWLB reflect the UK government’s borrowing costs in the gilt-edged market. So the collapse in government bond yields has made the Board a hugely attractive lender to councils, offering 45-year or 50-year loans at around 2.5%.

If councils then re-invest that money in buying shopping centres, office blocks and so on – investments that might yield 6%-8% or more – they are up on the deal. In effect, they have become carry-trade speculators, taking advantage of what John Plender in the FT ridicules as an “absurd circularity” in local government financing. With one hand the Treasury has “imposed austerity on local government; while with the other it facilitates arbitrage that helps mitigate that same austerity”.

What are the figures?

Last year some 49 local authorities spent a total of £1.3bn on property assets – a massive jump from the £142m total for 2015. A further £221m had been spent by the end of March 2017. Councils are buying up about a third of all regional property assets that come up for sale, according to an agent, close to some of the deals, quoted by the FT. “It’s slightly bizarre. I have never seen them come on so strong. They are outbidding mainstream commercial players,” he said. Shopping centres are most in demand. Last year Surrey Heath council spent £86m on The Mall in Camberley, Canterbury bought a 50% chunk of the Whitefriars centre for £79m, Stockport bought the Merseyway centre for £75m, while Mid-Sussex council spent £23m on a shopping centre in Haywards Heath.

What else have they been buying?

Other assets snapped up include offices, retail warehouses, industrial parks, solar farms, garages and country clubs. Easily the biggest single purchase, however, was by Spelthorne borough council in Surrey, which  bought BP’s office park in Sunbury-on-Thames for a reported £360m. Spelthorne took out 50 separate PWLB loans to buy the vast site, on maturities ranging from one to 50 years, immediately leasing it back to the oil giant on a minimum 20-year lease. The council’s total borrowings were £377.5m, which dwarfs its net assets of £39.7m and gross income last year of £73.9m. In balance sheet terms, the BP deal means that Spelthorne is in effect “now a property company with a sideline in providing local government services”, reckons Plender. “Even for the best of motives, it’s a highly risky bet.”

Why risky?

Any leveraged investment is risky. In this case, most of the deals are 100% debt-funded, leaving both councils and ultimately the UK Treasury exposed to immediate losses if property values fall, or if the envisaged yields do not materialise. Moreover, other market participants report that councils have been overpaying, amplifying the risks to them – and their local residents – of a future bust. More broadly, local councils do not necessarily have the expertise or experience to act as major property investors, leading some to claim that they are merely pumping up prices – the “dumb money” in the market.

“Local authorities have a long and inglorious history of gambling in the financial and property markets,” the former business secretary Vince Cable told The Guardian. For example, in the 1980s Hammersmith & Fulham, a local authority in west London, was one of several councils that landed in financial chaos after getting involved in complex bets on interest rates. “In some cases they may succeed,” reckons Cable, “but there is a very high risk of bankrupting their local authorities” if the property market turns and the investments turn sour. That, in turn, could threaten a serious systemic risk to the property market and UK financial stability.

Act local, buy global

In addition to making money from the arbitrage opportunity, councils have a secondary interest in buying commercial property in their own area: stimulating economic growth to expand their business tax base (from 2020 they will keep 100% of local business taxes, compared with just 50% now). Some councils, however, are investing both at home and further afield. Portsmouth, for example, has accumulated shops in Redditch in Worcestershire, a luxury car showroom near Southampton and a warehouse in Gloucestershire, as well as a local ferry terminal – prompting Baroness (Patience) Wheatcroft, the journalist-turned-peer, to remark:“I am prepared to believe that local authorities know a lot about social housing, but I am not convinced of their knowledge about Mercedes showrooms or ferry terminals.”'

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13 minutes ago, Will! said:

I suppose the councils think managing the shopping centres is good for the local economy.  Perhaps private equity shopping centre owners hope they'll be bought out by councils.

Bloomberg Businessweek:  Smart Money Gets Saddled With Forlorn British Malls

Nice find.So here we have UK councils stepping in where Private Equity fears to tread.

'Right now, there are about 2 billion pounds ($2.6 billion) of shopping centers owned by private-equity funds that would like to sell, said David Lockhart, chief executive officer of NewRiver REIT Plc, which invests in malls and stores. Prices have fallen for non-prime malls by more than any other type of commercial property since the June 2016 Brexit vote, according to research by broker CBRE Group Inc.

“We are not entirely comfortable with their price expectations, which relate back to a time before the Brexit referendum,” said Lockhart. “The world has changed.”'

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shocking...i know councils invest in commercial property for their pension funds and to partner with developers to regenerate locally but this is something else....

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It's more and more difficult to see the difference between the Soviet economy and the UK, except the latter insists on handing any gains over to private sector interests, no matter where they're from. Any legitimacy these institutions once claimed has long been destroyed by incompetence and greed.

Another excellent thread, albeit quite depressing.

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When I return to my home town of Birmingham, I often head into the centre just to take a look around.  But 4 hours parking now cost £5 in the cheapest car park, so I am starting to wonder why I both, especially when I don't always buy anything.

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5 hours ago, reddog said:

When I return to my home town of Birmingham, I often head into the centre just to take a look around.  But 4 hours parking now cost £5 in the cheapest car park, so I am starting to wonder why I both, especially when I don't always buy anything.

You can park in at least one car park all day for half that: https://www.google.co.uk/maps/place/Birmingham+Parking+£2.50+All+Day/@52.4805648,-1.9002772,15z/data=!4m8!1m2!2m1!1sbirmingham+parking+all+day+2.50!3m4!1s0x0:0xc158ac9ce150665e!8m2!3d52.4792571!4d-1.887673?dcr=0

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11 minutes ago, voldemort said:

I would not consider that area to be part of the centre.

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This has played out in a couple of shops near to me:

Premises owned by the council

Rent raised until the business can no longer survive and they move out of town/go internet only/go bust

New business moved in - a national chain, itself highly leveraged.

After a few months, the Chain shop goes into liquidation.

Shops now stand empty and have been for almost a year.

There is a circular effect with these, they want to force higher rents so that they are occupied by "premium businesses", who can then afford higher business rates.
If it works - brilliant, bonuses all round, but if they fail to find a tenant the council have a double loss and guess who will be picking up the tab?

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On 9/2/2017 at 11:13 AM, Sancho Panza said:

Nice find.So here we have UK councils stepping in where Private Equity fears to tread.

'Right now, there are about 2 billion pounds ($2.6 billion) of shopping centers owned by private-equity funds that would like to sell, said David Lockhart, chief executive officer of NewRiver REIT Plc, which invests in malls and stores. Prices have fallen for non-prime malls by more than any other type of commercial property since the June 2016 Brexit vote, according to research by broker CBRE Group Inc.

“We are not entirely comfortable with their price expectations, which relate back to a time before the Brexit referendum,” said Lockhart. “The world has changed.”'

David Lockhart is probably the best and most shrewd investor in this sector in the country.Im sure he will take them off councils hands for 30p in the £ like he has from the banks with most of the rest of the estate.Id rather give him my capital to invest than pay councils my council tax to lose.

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step 1.  Buy up all retail & office space.

step 2. Refuse permission for any competition to be built.

step 3. Profit!

 

But don't worry, the council will find a way to lose money somehow.

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23 hours ago, reddog said:

When I return to my home town of Birmingham, I often head into the centre just to take a look around.  But 4 hours parking now cost £5 in the cheapest car park, so I am starting to wonder why I both, especially when I don't always buy anything.

The parking charges are hilarious. The town is effectively inviting people in to spend money in the shops. And then they have the nerve to charge people for the right to park and go shopping. Do they want visitors or not? It's the equivalent of a restaurant charging you just to come in and look at the menu. Or a supermarket charging people who look around even if they don't buy anything.

They deserve to pay the ultimate price. Use Amazon instead until these people come to their senses. 

Edited by Errol

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Councils to spend £1bn on commercial property amid housing shortage

https://www.theguardian.com/society/2017/nov/17/councils-commercial-property-spend-council-housing-housebuilding

Quote

Kingston council in Surrey spent £54m buying two office buildings and a business park in the last year, but only invested in one new council house, a former school caretaker’s cottage.

Demand for social housing far exceeds supply and the borough has 9,524 households on an ever-lengthening waiting list.

The boom in commercial property investment dwarfs the amount spent on homes partly because central government restricts how much councils can borrow against their existing housing assets. However, the Treasury offers cheap loans that can be spent on commercial property. Councils have been using them in an attempt to create new income streams to fill budget holes left by Whitehall cuts.

Other councils’ recent commercial investments include a solar farm, and a shopping centre, cinema and bowling alley complex due for completion in 2020, in which Barnsley council invested £70m this year.

Spelthorne council in Surrey has spent more than £400m in the past 14 months on office buildings including the Sunbury-on-Thames campus of BP, and the headquarters of the contactless payment software company Verifone, located outside the borough.

The council said it made the latest purchase because “the withdrawal of funding for local authorities means that many councils are having to find new ways to fund services”. There is no council housing in the borough and it has warned of “very long” waiting times for housing, and said many people will not be housed.

Earlier this year, the Liberal Democrat peer Lord Oakeshott, who chairs a property management company, described the trend as “a gigantic game of Monopoly with taxpayers’ cash”.

Last week, the government warned that some councils were becoming overly dependent on commercial income to fund statutory services and could be left “financially exposed”.

 

Edited by Saving For a Space Ship

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On 04/09/2017 at 12:25 PM, Errol said:

The parking charges are hilarious. The town is effectively inviting people in to spend money in the shops. And then they have the nerve to charge people for the right to park and go shopping. Do they want visitors or not? It's the equivalent of a restaurant charging you just to come in and look at the menu. Or a supermarket charging people who look around even if they don't buy anything.

They deserve to pay the ultimate price. Use Amazon instead until these people come to their senses. 

I've been driving through Europe for several months in my campervan, and not only are parking charges extremely rare, but often they provide spaces for motorhomes with free services for water and waste. I've even had free electricity on several locations in France, right in the centre of towns.

It's amazing, you can go to a remote beach on the Spanish coastline and the carpark has a great big green bin for everyone to use, everytime. It's also owned by the municipality, not some National Trust type organisation, and it's for the people to use and enjoy and not for profit.

The UK is such a corrupt shithole in comparison. Pay for the car parks, signs saying NO OVERNIGHT etc. Over here you're allowed to park up. I've just spent 4 nights parked up next to a beach outside a campsite and never bothered. A few cafes around for me to frequent so my money went on helping businesses, not pushing pound coins into some parking meter (I did use the campsite for 1 night too so not to take the piss too much, owned by the municipality, cost me £7 with hookup, UK over double that everywhere).

 

Edited by honkydonkey

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8 hours ago, honkydonkey said:

I've been driving through Europe for several months in my campervan, and not only are parking charges extremely rare, but often they provide spaces for motorhomes with free services for water and waste. I've even had free electricity on several locations in France, right in the centre of towns.

It's amazing, you can go to a remote beach on the Spanish coastline and the carpark has a great big green bin for everyone to use, everytime. It's also owned by the municipality, not some National Trust type organisation, and it's for the people to use and enjoy and not for profit.

The UK is such a corrupt shithole in comparison. Pay for the car parks, signs saying NO OVERNIGHT etc. Over here you're allowed to park up. I've just spent 4 nights parked up next to a beach outside a campsite and never bothered. A few cafes around for me to frequent so my money went on helping businesses, not pushing pound coins into some parking meter (I did use the campsite for 1 night too so not to take the piss too much, owned by the municipality, cost me £7 with hookup, UK over double that everywhere).

 

Please, more.  This is the lifestyle I'm thinking of.  Web links, etc?  But having fun with a green bin - please explain.

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11 hours ago, Fence said:

Please, more.  This is the lifestyle I'm thinking of.  Web links, etc?  But having fun with a green bin - please explain.

Haha, the green bin isn't fun. All I was highlighting is the sensible nature of putting big bins in every car park. It avoids so much rubbish when people know there will be somewhere to throw it all away near by. 

As for the lifestyle, it's pretty great. Technology these days has made living in a van perfectly comfortable and is a great way to escape the system.

I work in my van, so all I need is the internet and power. Solar gives me one and an antenna on the roof and a mifi gives me the other. I've had 4g signal every day, every place for 6 weeks - I think being near the coast helps though.

You're not really welcome in a motorhome in the UK, so if you plan on doing it you're better off coming to the continent. No-one gives a monkies if you park up for the night in car parks etc, and there's plenty of places setup just for motorhomes - all be it for temporary stays, but out of season I think it's easy enough to stay for weeks.

https://www.youtube.com/channel/UCAj7O3LCDbkIR54hAn6Zz7A

https://www.facebook.com/groups/1083841051659706/?ref=bookmarks

http://vandogtraveller.com/

They're pretty good places to start exploring.

Edited by honkydonkey

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http://www.bbc.co.uk/news/uk-42132797

My local council (Hereford) has recently stopped most of the free on road spaces and put meters in, they always make these changes just before Christmas :)

Local businesses already complaining http://www.herefordtimes.com/news/15679823._quot_We_are_incredibly_upset_at_the_council_for_not_listening_to_our_views__quot____business_owner_on_on_street_parking_charges/?ref=mr&lp=17

Obvious to anyone without a brain piercing really but why do local councils always know best?

 

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Evidence given by Rt Hon. Philip Hammond MP, Chancellor of the Exchequer, Clare Lombardelli, Director, Strategy, Planning and Budget, HM Treasury to the House of Commons Treasury Select Committee Budget Autumn 2017 inquiry:

Quote

Stewart Hosie:  I have a final couple of questions, going back to something you said at the beginning about reserves being drawn down and, indeed, built up into the future for particular reasons.  Are you concerned that local authorities are not only stripping reserves but borrowing money to purchase commercial assets, such as shopping centres?

Mr Hammond:  Yes.  That is why we encouraged CIPFA to produce new prudential guidance, which has now been published and makes clear that local authorities should not borrow simply to invest in assets to generate yield.  They should borrow for investment in assets that deliver on one of their core functions, for example urban regeneration schemes, but not simply the acquisition of investment property for the sake of generating yield.

Stewart Hosie:  Have you had any kickback from local authorities that believe they have made the right decisions to generate income to provide local services in future?

Mr Hammond:  Local authorities are innovative in their approach.  Some local authorities spotted an opportunity to draw down on their borrowing capacity, with the public works loan board, in order to invest in commercial property.  We believe that this has created risk and that local authorities are not necessarily the bestplaced institutions to manage portfolio risk in commercial property investment portfolios.  The new CIPFA guidance draws local authorities’ attention very specifically to the risks, and suggests a way in which local authorities can appropriately invest in the future.  We are very comfortable with the new CIPFA guidance.  I am sure that what could have become a problem will now not become a problem, as a consequence of this new guidance.

Stewart Hosie:  Let us wait and see.

The exchange begins at 01:16:23 on https://www.bbc.co.uk/iplayer/episode/b09lc05m/select-committees-budget-2017-committee

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We make heroes out of entrepreneurs, so now everyone wants to play CEO: university chancellors, charity bosses, councillors.  

'Paying for talent, growing the business, building a brand...'

'Digging wells?'

'Nah mate, we outsource that to the villagers now...'

Also, didn't they privatise the audit commission?  Coincidence I'm sure. 

 

Edited by BuyToLeech

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On ‎27‎/‎11‎/‎2017 at 1:47 PM, wasbuckers said:

My local council (Hereford) has recently stopped most of the free on road spaces and put meters in, they always make these changes just before Christmas

It is all about money making and these councils are wringing every penny they can from motorists. I live in Barking and travel a lot in my own borough and neighbouring Redbridge they are both awful and it seems they bring in measures to catch people out and fine them. Lots on this topic in local papers.

I recently was involved in a parking issue with Redbridge where I had paid for parking by a company you phone called Ringo. I received a ticket and Redbridge denied I had paid. They claimed  they had contacted Ringo and Ringo confirmed that I had not paid. It was only when I went in person to the council offices and refused to move that they rechecked with Ringo and admitted I had paid. 

I travel on the old A13 which is now a two lane back water as the new three lane A13 is open. It has the inside lane as a bus lane, some parts the bus lane is between certain times then it changes to an any time bus lane. I think this is all to try and catch people out. 

Driving in the outside lane at many junctions you end up in the filter lane so you need to get over into the inside lane ( the bus lane finishes at these points ) then starts up again a few hundred yards further up the road. So driving down there, there is a constant  stream of traffic moving from one lane and then back again at these junctions. Again people have a high chance of making a mistake and entering the bus lane. Councils are meant to be about road safety and the best flow of traffic however I believe many of them are now only interested in doing as much as possible to catch people flouting ever increasing bad rules to make profit.

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Yep I agree. in Uxbridge a number of years ago they changed a well used road to buses only. I and pretty much everyone else didn't realise this and got stung for a fine. The numbers involved were huge. If so many people are caught out, then surely the problem lies in how it's implemented, and not the people. You can't just go, well we put a sign up and it's your fault.

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On 02/09/2017 at 12:20 AM, Sancho Panza said:

. Councils are buying up about a third of all regional property assets that come up for sale, according to an agent, close to some of the deals, quoted by the FT. “It’s slightly bizarre. I have never seen them come on so strong. They are outbidding mainstream commercial players,” he said. Shopping centres are most in demand. Last year Surrey Heath council spent £86m on The Mall in Camberley,

Which is a slightly rundown building in Camberley centre. And now in competition with the new Bracknell Lexicon...

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