27.10.17
Bricks, mortar, money
Paul O’Brien, chief executive of the Association for Public Service Excellence (APSE), and Phil Brennan, head of APSE Energy, discuss the opportunities for councils to invest in property assets for income generation and to develop greener local economies.
It surprises many that local authorities are already very active in the property and asset investments marketplace. In fact, a recent study conducted by CIPFA’s property team for APSE, ‘Bricks – Mortar – Money’, suggested that local authorities have spent more than £1bn on property assets in 2016.
This is a deliberate strategy to offset the impact of austerity budgets by providing councils with much-needed additional sources of funding. Unlike private investors, however, this investment allows councils to plough money back into local public services. With huge changes facing local government finance through reductions in Revenue Support Grant and the planned reforms to business rates, put on hold as part of the snap general election, some councils are ambitiously aiming to be self-funders, and see using revenue from such investments as assisting them in that endeavour.
Taking a commercial approach
Of course, whether or not councils are aiming to be self-funding, which we recognise will be both highly unlikely and controversial in many areas, there are still significant social gains to be had from councils taking an investment approach to their property and assets.
Whilst there are a number of reasons for undertaking such commercial activity, most councils will predominantly focus on one or two purposes: firstly, to achieve income generation, and secondly, to promote local employment or regeneration initiatives. In reality, many councils will aim to achieve both objectives, but recent headlines have intensified the focus on councils investing specifically to secure income-yielding assets, particularly when they have exercised their powers to do so outside of the local area. But with ongoing austerity, there is an understandable impulse for councils to act more commercially; indeed, local economic growth will be intrinsically linked to the reform of business rates.
Our research found that in 2016, some 49 local authorities spent a total of £1.3bn on property assets – a massive jump from the £142m paid in 2015. It is estimated that a further £221m was spent by the end of March 2017, the majority of which has been used for investment rather than operational property. However, it is not the scale of current spending that is arguably the most interesting story, but the potential for councils to do much more – and, by doing so, gain economic, environmental and social returns on their investment.
Greener economies and renewable energy
One such area is in the use of assets and investments for greener local economies. As new technologies develop, it is perfectly possible for councils to link their investment strategies to the development of energy efficiency strategies alongside income generation. For example, investing in a retail or housing development that includes solar energy schemes can see councils gaining not only the return on investment for the physical asset, but additional income from selling any excess energy to the grid.
With further improvements in battery storage technologies, it is easy to envisage property investments with renewable energy schemes being used proactively to reduce or even offset a local authority’s own energy costs. Greener investments could also help local authorities apply the Merton Rule principles to new developments. Leading by example, self-investment in local assets could help councils meet the ambitious target of all non-domestic buildings achieving zero-carbon status by 2019.
In a similar vein, local planning authorities will seek to ensure developments embrace reasonable requirements to include matters such as using a proportion of renewable energy and compliance with energy efficiency standards. However, this is often met unfavourably; what is to stop a developer going elsewhere if they view the requirements as a cost burden? Despite this, where councils are themselves part of that development, they can use their investment powers to improve energy standards and leverage additional environmental benefits than might otherwise be the case.
Think before investing
The emerging picture here is one of councils adopting investment strategies not just for income, but for social and environmental purposes. The situation is helped by the fact that local authorities can borrow from the Public Work Loans Board and other lenders at an extremely competitive rate because of their inherently strong credit position. Property assets can yield between 4.5% and 7%, so investment of this nature makes good economic sense.
However, as the radio adverts always say, ‘returns can go up as well as down’, so we are certainly not advocating for local councils to take a casino banking approach when their foremost duty is to provide good local public services.
Our research publication sets out a number of steps that councils should consider before embarking on any new or additional investment strategies. This includes having clarity about what it is they are seeking to do; ensuring the right skills are in place, including an understanding of risk; and clarity of purpose – is this for income generation, social returns such as regeneration and investment, or both? – as well as embedding accountability and due governance arrangements into the strategy. If things go wrong, there is not only a monetary risk to the local authority but clearly a reputational risk, which most discerning councillors will wish to avoid.
Top Image: Bogdanhoda