Assets and investments: the opportunity for local authorities

Type Perspectives

Date 28/09/2017

The last 18 months has seen the rise in the profile of Local Authorities participating in the real estate investment market.

Transactions have drawn comment from investment professionals questioning Local Authorities’ participation in the market. The reality is that quality investment stock is an attractive source of revenue to Local Authorities under pressure to fund core services and many Local Authorities have significant experience in property investment and are well equipped to participate in the market along with access to flexible borrowing facilities.

The extent of historic accumulation of real estate and these new acquisitions is highlighted by a GVA recent exercise that showed that Local Authorities in England currently hold more than £12bn of investment and surplus assets. This is not evenly spread over the Local Authorities and small boroughs can hold £50m+ of non-operational assets and large cities may own virtually none.

The opportunities and constraints that a Local Authority operates within when managing its non-operational portfolio differs to those faced by private sector investors.

Conventional asset management would consider a portfolio and seek to exit from the weaker assets and buy stronger ones but the Local Authority may need to stay invested in the weaker assets as they can be important assets.

The properties are generally in the Local Authority boundary and contribute more than just rent. They provide ‘places’ that support businesses and jobs; provide services and accommodation. A Local Authority needs to look at the contribution an asset makes to ‘place’ when making investment decisions.

This will require them to work harder to keep them in use or change their use to something that makes a contribution to place. And anyway, why sell the asset to someone who would hold it empty or convert to something more valuable and keep the profits?

Most property generates business rates or Council tax and this is a contribution to the public purse. Ancillary income such as car parking often accrues to the Local Authority and the wider benefit of a more vibrant economy from occupied buildings is more upside.

So Local Authorities need to look at their portfolios actively and that means either employing staff who can manage property or retaining advisors with the outlook and skills to do it with them. Finding both in the market is tricky and often going for the lowest price option means they miss out on the wider benefits from looking at assets in a less conventional manner.

So as Local Authorities continue to address the revenue squeeze, what they currently own that can generate more income is a good place to start but it requires a different way of looking at property portfolio management to deliver the whole range of outcomes that are possible.