From a M&S store to Caffe Nero: Where councils have spent £60m of your money on property so far
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Two Suffolk councils are pumping another £40m into commercial property, despite the economic crisis and making a multi-million-pound loss. Emily Townsend investigates.
Nestled in the heart of Nottingham city centre, 120 miles from Suffolk, is a hair salon and GP surgery which last month became the latest property bought by CIFCO Capital Ltd, owned by Babergh and Mid Suffolk district councils.
Snapped up during the pandemic, this latest £2.9m venture adds another string to CIFCO’s growing property bow, which spans from Ipswich to Southampton.
It is financed through £60m of borrowed cash. Just one of the 15 properties CIFCO now owns is actually in Suffolk.
Last year, rents from tenants ranging from a town-centre Wagamama to an industrial estate generated £1.6m for council services after debts were repaid giving it a return of 3.2%.
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This model of borrowing public money and investing it in commercial property is not unique to Suffolk – but it is controversial.
Since 2016, councils have poured £7.6billion into everything from retail parks to solar power to counteract squeezed budgets.
The popular practice, which has ballooned 14-fold in four years, is currently under investigation by a parliamentary committee amid calls for a nationwide ban.
MORE: Council property investment firm plans supermarket and drive-in investmentsOpposition parties, including the Green Party, have attacked the purchases, saying councils should instead focus on investing in things like housing in their own areas.
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By next October, CIFCO wants to spend the remaining £40m its council owners borrowed from the taxpayer-funded Public Works Loan Board (PWLB) in 2017.
Offering interest rates historically lower than those offered by private lenders, the PWLB is meant to be used to fund local infrastructure projects in councils’ own areas.
Borrowing from the facility has increased at a rapid rate recently with many councils using the money to invest in commercial property.
MORE: Councils threatened with bankruptcy by coronavirus crisisDespite Covid-19 and the worst recession for decades, the firm’s directors claim now could be the right time to target properties made cheaper by the crisis.
They dismissed concerns about their tenants defaulting on rent in the recession. From April to June they said they collected 70% of rents, despite one tenant in Lincoln, DW Fitness, collapsing.
But the firm’s latest accounts for 2019/20 reveal a stumbling block in the form of “significant” losses. CIFCO lost £3.5m in a year last financial year partly because Covid-19 has hit the value of their investments.
A closer look shows even before the virus hit, the firm had been losing considerable amounts of money. Aggregate losses in net income (money left over after debt and income is repaid to the councils) now stand at £8m since CIFCO’s 2017 launch.
They put this down to the costs of buying 14 properties, including stamp duty and fees. The directors predicted further losses this year.
‘Weathering the coronavirus storm’
Andrew Stringer, opposition Green councillor at Mid Suffolk Council, voted against CIFCO investment continuing at a meeting last month.
He questioned continuing to spend millions on commercial property during the current crisis, adding: “I don’t see people flocking to buy commercial property right now. Especially now they’ve realised most people can work from home.
“We, all along, were saying please don’t do this. Can we build houses with it, as we’ve got a housing crisis?”
Mr Stringer’s concern jars with the optimism of Henry Cooke, CIFCO’s non-executive director, who believes now could be the right time to snap up cheaper properties, but acknowledges public concern over timing.
He said: “When financial markets are stressed, you occasionally come across force sellers (struggling firms forced to sell properties for a cheaper price).”
He added that the company would weather the “coronavirus storm”.
Currently, around 15% of CIFCO’s portfolio is retail and 26% is offices - the two areas where the British Property Foundation in May warned could harbour greatest risks of rents not being paid during coronavirus.
The remaining 59% spans leisure, hospitality, industry, car sales and most recently, health. This year, CIFCO plans a further move away from retail.
But tensions are growing locally now that CIFCO has been given the go-ahead to spend another £40m.
Mid Suffolk, which has £17m in reserves, made the decision by casting vote at last month’s full council meeting. At Babergh, where finances are more stretched, most councillors also wanted to press ahead.
Mr Stringer said he felt it was “outrageous” that councillors were not able to see CIFCO’s accounts before votes were held.
But Alastair McCraw, Independent Babergh councillor and co-chair of the councils’ joint scrutiny committee said it was not the job of the committee to delve into them.
He said now wasn’t the time to be “throwing the baby out with the bathwater”.
He added: “(With CIFCO’s income) we are covering services. Those services would not be covered elsewhere. We have no other income source to replace the £1.6m. Our job is to keep this as safe as humanly possible.”
Treasury chiefs are clear local councils “should not be reliant on rental income”, and warn the £3.7bn Covid-19 fund for local authorities should not cover lost rent. They also said this kind of borrowing “exposes taxpayers to the risk income does not materialise”, meaning the public could be liable if companies fail to cover loan repayments.
This renewed national scrutiny has seen bosses of the Suffolk councils defending their chosen mode of borrowing amid a recent nationwide consultation aimed at banning it altogether.
Don Peebles, of Chartered Institute of Public Finance and Accountancy which advises councils on finances, warned even well-risk assessed commercial investments could “put public money at undue risk”, especially during Covid-19.
But Mr McCraw said the two Suffolk councils are “very small players” in the national game, adding: “There are councils across the country who are going to make errors in their judgement and acquisitions. We won’t do that – I won’t let them.
“We are very aware of how vulnerable we are, so we are more careful.”