Government decision halts public loans to fund controversial council investment firm acquisitions
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A council-owned Suffolk firm controversially using tens of millions of pounds of public loans to invest in commercial property will no longer be able to do so in future, after rules around borrowing have been changed.
Babergh and Mid Suffolk district councils formed a joint venture, CIFCO Capital Ltd in 2017, tasked with investing £100million of cash borrowed from the Public Works Loan Board (PWLB) into properties as a means of making income.
The Treasury held a consultation earlier this year on the future terms of lending on the Public Works Loan Board (PWLB), with particular concerns that it was being used too much for councils to buy property as an income stream.
MORE: What is CIFCO and how does it spend public loans?As part of the Chancellor’s Spending Review on Wednesday, it confirmed it would halt the practice.
“The Government will reform the Public Works Loan Board lending terms, ending the use of PWLB for investment property bought primarily for yield, which presents a risk for both national and local taxpayers,” the review report said.
CIFCO is providing an income of around £3m annually to the two councils, designed to help address the problem of squeezed budgets in recent years, but has also recorded losses of £3.1m and £3.5m in the last two years.
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But the practice has proved divisive amid concerns that councils should not be attempting to play the property investment game and that the majority of CIFCO’s assets are outside of Suffolk.
So Far, CIFCO has invested around £70m of the £100m agreed, and it is understood the Treasury’s announcement on Wednesday does not impact on assets already bought or the remaining £30m agreed but not yet spent.
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However, it will not allow future borrowing for the purpose of property-for-yield activities.
A spokeswoman from the two councils said: “To date we have invested £70m of the agreed funding in order to generate future income for our districts – and plan to invest the remaining £30m by October 2021.
“We are not anticipating any increase in investment in CIFCO beyond the agreed £100m, so today’s announcement doesn’t affect the investment strategy agreed by our councillors.
“We will continue to make careful and well-considered investments, which we do not feel present a risk for taxpayers. We have a balanced portfolio to minimise exposure to any one sector, tenant or location.
“Since its launch in 2017, CIFCO has helped us reinvest almost £3m in council services, helping us to offset reductions in funding from central Government and create a long-term source of income.
“The returns received from CIFCO allow the councils to meet loan repayments, with extra income on top then ploughed back into council services – at a time when the coronavirus pandemic has significantly affected other traditional income streams.”
The Government’s decision has been welcomed by the opposition Green and Liberal Democrat group at Mid Suffolk District Council.
Councillor John Matthissen said: “The Government made clear its intentions over two years ago, and again in launching a consultation on PWLB in May this year.
“We particularly regret the very recent purchases by CIFCO despite these warnings and public opinion, putting a further £13m of council taxpayers’ money at risk. Green and Liberal Democrat councillors have opposed this venture from the outset and also pointed out Government intentions as they were made clear. It is disappointing that the two councils have pressed ahead with the second £50m loan, buying more than £20m of remote commercial buildings.”
Councillor Robert Lindsay, Green group leader at Babergh, added: “As a local authority Babergh’s focus all along should have been in investing in housing and other infrastructure for its own citizens.
“Instead it has now spent two years chasing down the dead end of accumulating commercial property in obscure second tier towns outside the area it serves.
“Most of these assets now face an uncertain future given what the pandemic has done to the office and retail property market.
“This latest ruling from Government ought to mark a line in the sand for future acquisitions for the council’s property vehicle CIFCO and the council should now divert its time, energy and finances into building social housing in the Babergh area.”
According to the councils, income from CIFCO investments had proved to be one of the most resilient during the Covid-19 pandemic, while bosses said the losses were only paper losses because there was no intention to sell the investments quickly as they are designed to deliver a steady income.
The two councils’ leaders have defended CIFCO’s operations.
MORE: What properties are in CIFCO’s portfolio?Babergh leader John Ward said: “The income we receive from the CIFCO portfolio can already be seen within our districts, enabling us to invest in local regeneration and in meeting the needs of our residents.
“CIFCO is continuing to weather the storm through the careful selection of the properties it invests in – only progressing those that best meet the investment criteria and most benefit the balance and risk profile of the portfolio as a whole.”
Mid Suffolk leader Suzie Morley added: “Like all local authorities, we are under unprecedented financial pressure to deliver services to our residents.
“The aim of our investment through CIFCO is to deliver a source of income for the long term rather than eventually being forced to make reductions to our services.
“Through these carefully considered investments, CIFCO will continue to bring in much-needed income to support our district’s recovery post-Covid.”
Ipswich Borough Council has also established a commercial property acquisition firm, Ipswich Borough Assets, to generate a rental income, but has largely focused on assets in and around the town where it can also have an added bonus of bringing back into use empty buildings as well as providing a rental income.
However, earlier this year it did acquire its first non-Suffolk holding with a £22m investment in Peterborough Business Park.
It is not clear if the firm had been looking to expand its efforts outside of Suffolk any further.