Concerns over councils investing in retail properties…

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Retail Investments:

A recent trend for
hard-pressed local councils to supplement their income by borrowing
to invest in commercial property could be a dangerous short-term fix
warns central government.

The Treasury is
attempting to steer local authorities away from this strategy, some
of which have purchased retail premises occupied by struggling high
street businesses. The result, thinks the Treasury, could be councils
being forced into bankruptcy.

Fall-out from High
Street businesses going bust, creating high vacancy rates in many
towns, results in rapidly falling local property values. Last week
interest rates from the Public Works Loan Board were increased by one
percent last week to reflect the increased risk, the Sunday
Telegraph reported.

As interest rates
rise, the cost of borrowing for local authorities could skyrocket,
while potential loss of income from long-term vacancies could
jeopardised the solvency of many a local council.

In the face of
struggling retail centres some councils have been snapping-up
shopping centres – five have been sold to councils since 2016,
while property companies have been exiting the sector. Whilst these
councils may have experienced a welcome initial income yield, this
often proves short-term; prices are low for a reason, and property
investing expertise is often lacking.

A recent deal involved Hammerson offloading the St Oswald’s retail park in Gloucester to the local council for £54m as the leading property company continued its own strategy of dumping retail shopping centres. Likewise, Mole Valley district council in Surrey bought an Asda site in South Wales for £11.5m, according to reports by The Sunday Telegraph.

Large property
companies are experiencing a torrid time in retail, with values
collapsing as more retailers go to the wall: Hammerson, British Land
and Intu have all seen their portfolio valuations and profits
decimated as their retail tenants close stores, seek rent reductions
or trigger controversial company voluntary arrangements (CVAs) to
rationalise and restructure.

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