As everyone who works in or with public service organisations knows, finances have been hit hard for over a decade by austerity measures. The National Audit Office estimates that councils’ spending power has been reduced by a third, while at the same time demand for services has soared¹.

With increases in council tax limited, many councils developed commercial activities to generate revenue. These have been broad in scope, including investment in solar farms, development of energy and waste companies and setting up joint venture companies to deliver core council services.

One activity in particular took off rapidly over the last ten years: property investments. Investment in commercial property by councils has increased from £53 million in 2010/11 to £2.2 billion in 2018/19². And this investment isn’t limited to councils’ geographic area of operation – on average 48% is invested in properties elsewhere².

Public Works Loan Board

This huge upsurge in property purchases has been facilitated by councils’ access to the Public Works Loan Board (PWLB) which provided funding on preferential terms. Crucially, the PWLB made loans based on two premises: that councils themselves are best placed to decide whether they can afford the repayment terms, and councils know best how to support their local communities. This availability of ‘cheap’ money drove a minority (but a significant number) of councils to borrow substantial sums to purchase investment property with the primary aim of generating revenue, rather than in direct support of local needs and development.

Many of the schemes have been successful in delivering on both objectives. Probably the highest profile council with an investment strategy based on yield is Spelthorne Borough Council in Surrey. It has purchased commercial property valued at over £1 billion in recent years. Its annual repayments to the PWLB amounted to £24 million in 2020, which was serviced by annual rental income of around £50 million. It has been successful in that after various provisions, almost £10 million was available in 2020 to fund services in the borough. This amount is significantly more than the £8.2 million the Council expected to generate from council tax³.

Not all councils have made their investments based on yield alone. Others have focused on regeneration. While these councils can still generate yield, they also have separate longer-term goals to enhance local areas. An example of this strategy is Woking Borough Council, also in Surrey. It has redeveloped the main shopping Centre and built three high rise blocks. The Council also has plans for the future regeneration of a housing estate as part of a 15-year place-making strategy agreed in 2012. One of the drivers for Woking was an assessment it made of the town centre and the wider retail environment, identifying that if no intervention was made the town centre would likely struggle in future⁴.

Town centre regeneration is a strategy Spelthorne also adopted. In February 2019 it announced a focus on housebuilding and also bought a shopping centre in Staines. As one of the Councillors explained: “it’s not that we want to be high street landlords … it’s more a case of medium-term place-making to bring the heart back to the town in terms of protecting it and also making sure there is a destination. Getting people back into the town centre again”.⁴

Despite success stories like those above, there were wider concerns about councils over-stretching themselves financially and geographically, while allowing them to continue to carry out investment activities related to service delivery, housing and regeneration.

In November 2020, the Government announced the result of its consultation into the PWLB, which was launched just as the pandemic hit last spring. For councils this consultation coincided with the increased call on resources to manage pandemic-related needs.

The Government has effectively banned councils from investing in commercial property primarily for yield. Whether the pandemic brought this decision forward is a moot point, but it has exposed the potential vulnerability of councils that invested with profit as their primary motivation.

The change of funding policy is a timely reminder that councils should continue to establish, monitor and review their risk appetite regularly in respect of commercial activities, just as they do with core services.

Impacts

There are various potential impacts of the pandemic on commercial property investments, both the short to medium-term and those with potentially longer-term and wider consequences.

The short-term impacts are clear; from the first lockdown and at various times since, many businesses have had to close their doors. While there was a swift and welcome decision to remove business rates in retail, leisure and hospitality for 12 months; with most of their income wiped out for significant periods in 2020 and the first quarter of 2021, their ability to pay rent was significantly reduced. This affected all sizes of business, from  small independent retailers to national chains, many of whom had tried to re-negotiate rents in previous years.

Councils with property portfolios skewed towards retail have been particularly affected. The British Property Federation estimated that just 15% of rents owned to landlords were collected in June 2020⁴. Even where the portfolio was mainly office block based, because of the Government requirement for people to work at home, many have been largely unoccupied for months.

The extension of business grants and loans, and the furlough scheme to the end of September 2021, will help businesses in the short-term. However, the staged reopening of retail and hospitality did not start until mid-April, and some large retail closures mean some will never reopen. It remains unclear how high street or out of town shopping centres will fare once Government support is removed.

The outlook for councils relying on rental income from property portfolios to balance their books looks similarly uncertain. Councils particularly vulnerable are those that have invested out of area and will not have the option of influencing local policy on regeneration.

Requiring employees to work at home has had an obvious effect on town and city centres. One inner London chief executive said office occupancy reached a low of six per cent at one point during the 2020 national lockdown⁵. Public transport and local retail and hospitality businesses have been particularly hard hit. Leaving office accommodation unoccupied for a long time presents its own risks for managing buildings. A growing number of unoccupied buildings in town centres has been an issue for councils for some time, exacerbated by the pandemic.

While it is important that council assets are protected when unoccupied, it can make the area unattractive for visitors. Many premises boarded up or obviously empty can create a vicious circle, with a further reduction in footfall to an area. Some councils have installed fake shop fronts to give the illusion of a vibrant street scene.

Economic trends

Longer-term impact on commercial property investments is somewhat reliant on what the future of work looks like. While acknowledging that large parts of society are unable to work remotely, (including many in public services) the potential for movement of retail and hospitality demand and economic activity from city centres to the suburbs and local towns, is starting to be realised.

Lockdown and changing working practices are also altering shopping habits. Working from home, with little or less time commuting has meant we’ve become more reliant on local shops. Now 81% of us are using local shops as much or more, compared to pre-pandemic⁶ shopping habits.

The shift to remote working was already underway before COVID-19 struck, but it seems that continued remote working or at least a hybrid arrangement is here to stay. It does mean that councils have a once in a generation opportunity to look at their town centres and make strategic decisions based on what may be emerging as a new normal.

To regenerate local areas and protect commercial investments, councils are coming up with creative solutions to adapt town and city landscapes to a new retail era and post-pandemic use.

To increase appeal and keep businesses and investments viable, town centres will invariably evolve into mixed use spaces, incorporating residential, leisure and ‘experiential’ facilities into traditional office and retail areas.

In Bristol, COVID-19 provided the impetus to turn part of the city centre into a pedestrian only zone (ibid). Many councils widened pavements in 2020 to allow for more social distancing. These measures are now being expanded long-term to improve cycling (or other micromobility) and pedestrian facilities, with reduced vehicle access making high streets more appealing as leisure locations.

The Government urged creation of a continental pavement culture in the UK to meet health protection and business requirements, and this culture could stick. Leicester City Council was one of many that offered 120 extra free pavement licenses to city centre businesses in advance of outdoor hospitality returning in April 2021⁷.

Hospitality venues could be supported by councils to develop more permanent outdoor space for customers to enjoy.

Councils are also being lobbied by businesses not to forget the after dark economy, and many are working with local traders and venues to create safe and exciting commercial centres. Equally, local businesses could respond by varying opening times. Many still open primarily for office workers and commuters, likely to continue to be a diminishing market.

Empty retail units and falling rents may provide opportunities for small or new businesses or pop-ups, to take on premises for the first time. Councils owning properties can facilitate innovative ways of using commercial spaces by becoming more flexible with leases and letting arrangements.

The Local Government Association has a useful toolkit available which has recently been updated in the light of the pandemic – Revitalising town centres: a toolkit for councils⁸. This was developed in association with People and Places which has created its own checklist⁹.

These resources provide guidance on understanding how people use town centres, improving the public realm and investing in regeneration, among other topics.

Like it or not, the fallout from the pandemic will be long lasting and decisions made now need to be fit for the future. It is imperative that a council considers risks and insurance implications early when exploring new opportunities.

References

¹theguardian.com/society/2021/mar/10/swingeing-cuts-on-cards-as-councils-in-england-face-funding-crisis-watchdog-warns
²localgov.co.uk/councils-warned-about-risky-investment-in-commercial-property/51069)

³publicfinance.co.uk/news/2020/12/spelthorne-commercial-income-set-rise-despite-covid-19
⁴d3n8a8pro7vhmx.cloudfront.net/taxpayersalliance/pages/17069/attachments/original/1599680063/local_authority_commercial_property_investments_september_2020.pdf?1599680063
⁵localgov.co.uk/What-next-for-the-capital-post-pandemic/51804
⁶grayling.com/news-and-views/what-s-in-store-for-our-high-streets-post-pandemic/

⁷business-live.co.uk/retail-consumer/leicesters-cafe-culture-gets-boost-20330123

⁸local.gov.uk/topics/economic-growth/revitalising-town-centres-toolkit-councils
⁹people-places.net/wp-content/uploads/Creating-a-town-centre-recovery-plan-June-2020.pdf

¹⁰publicfinance.co.uk/news/2021/02/reading-halts-commercial-property-investment-programme.

This note is not intended to give legal or financial advice, and, accordingly, it should not be relied upon for such. It should not be regarded as a comprehensive statement of the law and or market practice in this area. In preparing this note we have relied on information sourced from third parties and we make no claims as to the completeness or accuracy of the information contained herein. It reflects our understanding as at 13^th April 2021, but you will recognise that matters concerning COVID-19 are fast changing across the world. You should not act upon information in this bulletin nor determine not to act, without first seeking specific legal and/or specialist advice. Our advice to our clients is as an insurance broker and is provided subject to specific terms and conditions, the terms of which take precedence over any representations in this document. No third party to whom this is passed can rely on it. We and our officers, employees or agents shall not be responsible for any loss whatsoever arising from the recipient’s reliance upon any information we provide herein and exclude liability for the content to fullest extent permitted by law. Should you require advice about your specific insurance arrangements or specific claim circumstances, please get in touch with your usual contact at Risk Management Partners.

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