Carry on local authority

John Plender has written before about the increasing presence of local authorities in the commercial real estate investment markets – and I’ve blooged about his article before.  He obviously doesn’t think that the story gathered sufficient attention or traction because he’s written another extended piece in the FT.  It basically covers the same ground but, I’d agree, that it’s a strange phenomenon.  In order to plug funding gaps…

UK local councils are engaging in what is known in the financial jargon familiar to hedge fund managers as a carry trade — a form of arbitrage whereby they borrow at rates much lower than private sector borrowers can obtain in order to invest in property that shows a much higher yield. Money borrowed at 2.5 per cent or so is typically going into property yielding 6-8 per cent or more.

The acquisition by one local council in Surrey of a major business park has transformed its balance sheet.  John Plender argues that

…the BP office park purchase transforms the nature of the council. In balance sheet terms, Spelthorne is now a property company with a sideline in providing local government services. Even for the best of motives, it is a highly risky bet.

Late last year, a report by the House of Commons Committee of Public Accounts concluded that

We are concerned that the Department for Communities and Local Government (the Department) appears complacent about the risks to local authority finances, council tax payers and local service users resulting from local authorities increasingly acting as property developers and commercial landlords with the primary aim of generating income.

Fascinating stuff.

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