Fresh concerns raised about council investments in commercial property market

As we reported last month, the level of investment in commercial property undertaken by UK local authorities is raising serious concerns within both central government and the real estate sector. Now, a fresh warning has been issued by the former business secretary Sir Vince Cable that councils face potential bankruptcy if the property bubble bursts. In recent years councils have faced an average 37 percent real term cut in government funding and so have taken to borrowing large sums at low interest rates from the Treasury’s Public Works Loan Board to reinvest in commercial property ventures. The move has already been identified as risky by the Government’sown Public Accounts Committee and Cable joins a chorus of voices in expressing doubts.

“Local authorities have a long and inglorious history of gambling in financial and property markets,” he said. “When they are massively constrained in what they can do around council tax – and indeed commercial rates – they are trying to prevent even deeper and more damaging cuts by taking these unorthodox measures. In some cases they may succeed, but there is a very high risk of bankrupting their local authorities. It does suggest a certain degree of desperation. What is so bizarre, so shocking, is that they are investing in property in other parts of the country. It makes no sense whatsoever.”

In the interview cited in the Guardian, Cable compares the situation to that in 2008 when councils who had deposited large sums with Icelandic banks to take advantage of high interest rates were left exposed when those banks went bust during the global financial crash.

“It did very serious damage to some councils,” Cable said. “It should have been a warning to all corporate treasurers in local government to not go anywhere near this.”

 

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