Thursday, 23 February 2017

Knowle relocation project: how relocation is being financed >>> "While local authorities are furiously selling assets to plug gaps in their budgets, they have simultaneously been accumulating property assets"

Local government is apparently all about stripping assets 
Futures Forum: Knowle relocation project ... and 'asset renovation'

... and dabbling in property speculation:
Futures Forum: Knowle relocation project: throwing good money after bad >>> How the Honiton and Exmouth HQs will not improve on the current HQ
Futures Forum: Knowle relocation project: District Council planning application for Honiton HQ >>> 16/1292/MFUL approved

And actually, they can do both at the same time:
Futures Forum: The District Council and its assets: to 'release assets' or to 'invest in assets'?
Futures Forum: Redeveloping East Devon >>> of 'income streams' and 'regeneration'

As spotted by a correspondent, 'this is how relocation is being financed':


A quirky and hazardous corner of British public finance

It is not sensible for an offshoot of government to compete with commercial banks
Over the past 18 months a bizarre two-way traffic has emerged in UK local government finance. While local authorities are furiously selling assets to plug gaps in their budgets resulting from central government funding cuts, they have simultaneously been accumulating property assets across the country. Such has been the buying spree that they are now a significant force in the commercial property market. This is largely thanks to cheap finance provided by an arm of the UK Treasury.

The arm in question is a curious government outpost in the City of London called the Public Works Loan Board. It is a statutory body, with up to 12 unpaid commissioners appointed by the Crown, which has been helping finance local government capital spending and infrastructure investments since 1793. The commissioners’ role is largely ceremonial because the PWLB is in fact run by the UK Debt Management Office, an executive agency of the Treasury. It will shortly be abolished and its lending activity formally taken over by the DMO.
The crucial point about these operations is that the interest the PWLB charges reflects the government’s borrowing costs in the gilt-edged market. So the collapse in government bond yields has turned the PWLB into an extremely low-cost lender, dispensing loans at maturities of up to 50 years. The average rate of interest on the money it advanced in its last financial year was about 3.2 per cent.
This cheap funding opportunity has been seized by local authorities suffering under Treasury cuts. They have become carry traders in the commercial property market. That is, they borrow at rates much lower than those available to private sector borrowers to invest in assets that show significantly higher initial yields. The margin they earn over borrowing costs is used to shore up services that would otherwise be cut back such as children’s centres, social care services and libraries.
Such borrowing requires far less due diligence than a loan from a commercial bank. Small wonder that local authorities are now among the biggest buyers of shopping centres, plunging into the office market and dabbling in hotels and garages. The sums involved can be big. Last year Spelthorne Borough Council in the southern English county of Surrey bought BP’s business and technology campus for £360m with the help of a 50-year PWLB loan.
This new force in the property market has plenty of room to grow. The PWLB’s outstanding loans, which stood at £65.3bn in March 2016, are permitted under its existing remit to rise to £95bn. While gilt yields have risen since the middle of last year, they remain at historically low levels. Meanwhile yields on commercial property investment have risen since the Brexit referendum.
Yet, while the carry trade is at present a rational activity for local authorities, it is clearly not what they are meant to be about. Nor does it seem sensible for this quaint offshoot of government to compete with commercial banks in property lending. There is also an absurd circularity in the process. Under George Osborne, former chancellor of the exchequer, and now Philip Hammond, the Treasury has with one hand imposed austerity on local government; while with the other it facilitates arbitrage that helps mitigate that same austerity.
Given local authorities’ limited experience of commercial property investment, the dangers are clear. It is worrying, too, that many appear to enjoy unduly favourable borrowing costs relative to their financial condition.
In the meantime we are witnessing the creeping nationalisation of the UK property market under a Conservative government. As well as being paradoxical, it seems remarkably silly in a whimsically British kind of way.
A quirky and hazardous corner of British public finance - Financial Times

See also:
Richard Cohen, East Devon’s Deputy CEO on opportunities & innovation | Room 151


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