There’s a fascinating piece by John Plender in the FT on the growing importance of local authorities in the institutional real estate investment markets. It illustrates how implicit government guarantees can create perverse outcomes in markets. In this case, access to cheap loans for local authorities seems to be enabling them to have become a major player in institutional real estate investment.
Over the past 18 months a bizarre two-way traffic has emerged in UK local government finance. While local authorities are furiously selling assets to plug gaps in their budgets resulting from central government funding cuts, they have simultaneously been accumulating property assets across the country. Such has been the buying spree that they are now a significant force in the commercial property market. This is largely thanks to cheap finance provided by an arm of the UK Treasury.
It was Judith Evans in the FT that identified the trend in a piece in November. It’s also worth reading. It seems like an odd way to fund local government.