Councils that dabble in the property business often pay too much for the properties they are buying because they lack experience and are seen by estate agents as ‘buyers of last resort’ according to one property expert.
His comments come as there were further warnings in the national press this weekend that owners of commercial properties may face having to deal with the plunging value of their assets.
The significance to Hastings is that the town’s Borough Council (HBC) has borrowed close to £50m in the last five years to invest in commercial property. Those loans will take decades to pay off and critics of the scheme fear catastrophe for the town’s finances if tenants move out of council owned property and the rents dry up.
HBC is just one of many councils to have started to invest in commercial property as a way to raise cash to plug holes in their budgets left by a reduction in central government funding. But according to James Watson at Colliers, a leading commercial estate agency, councils are, “operating in a vacuum because there aren’t other deals out there at the moment. The intent is admirable but they don’t have the experience to know if they are striking a deal at the right price. The problem is that there is such a rate of decline that they risk paying empty rates on vacant units to themselves.”
The Sunday Telegraph’s Retail Editor Ashley Armstrong wrote at the weekend: “The growing challenges facing the sector are now raising grave fears about inflated retail property values, which risk exposing landlords – including listed property developers, local councils and pension funds – to steep falls. Analysts fear that if property values slump by ten per cent there could be a potential £30bn correction shock to the UK economy.”
Last year, 50,828 shops shut across the country, according to figures compiled for The Sunday Telegraph by the Local Data Company. High street names including Maplin and Poundworld tumbled into administration while chains such as Carpetright – a tenant of Hastings Borough Council – have shut stores and renegotiated the rents they pay in others to reduce costs.
Armstrong wrote in her Sunday Telegraph article that the property industry has been deaf to the implications of what she describes as a potential ‘bloodbath on valuations’. While valuers rely on a complex mix of factors when assessing how much they believe a property is worth, including how much it was previously sold for, its square footage, how much rent it currently generates and the length and strength of its leases the number of property transactions has hit a 20-year low which makes those calculations less straightforward.
“As the market gets thinner and less well traded, you have to rely more on subjective judgment of evidence,” says Andrew Renshaw, at property agent JLL.
In December the Royal Institution of Chartered Surveyors (RICS) instructed property agents to reflect what is happening in the retail sector of the economy in the valuations they were making and it warned that ‘structural change’ in the property market might not have been reflected in recent market activity.
Armstrong writes: “There is every indication that there are more problems on the way for landlords and property investors. About 23,000 shops are forecast to close in 2019, according to experts.
“High street bellwether Marks & Spencer is slashing up to 100 stores over the next five years, Sir Philip Green’s Arcadia is looking to shrink its vast estate, and Debenhams is attempting to cut store numbers in half. Stronger retailers, including Next, are also using the chaos to push landlords into accepting lower rents.”
One property expert is quoted as saying that property was already overvalued before the retail market started to go badly. He says investors fear valuations could be significantly lower than previously thought and points out that last year alone the value of retail property fell by 7.4 per cent.
Meanwhile, the amount councils have spent on property investments has soared from £76.4m in 2015 to £1.8bn last year. Local councils are able to tap funding from the Public Works Loan Board at relatively low two per cent borrowing costs. However, there are growing concerns that they are vastly overpaying because of the warped valuations market.
“Valuations are an art, not a science, and they are backward looking,” says David Wise at Kames Capital. “Local authorities are a buyer of the last resort but they don’t have their eyes open and are not specialists. Too often they pay significantly more than anyone else is paying. As a fund manager, it’s appealing, but as a taxpayer I have a big problem with it.”
HBC leader Peter Chowney believes, however, that what HBC has done has been prudent and the council has spread the risk. The fact the portfolio of properties owned by HBC is significant means, he says, that the council could withstand the loss of a significant tenant. He believes too that the key to success is in HBC’s policy of spreading it’s risk across a number of sectors of the economy. It already owns property used for light industrial uses, it has acquired significant interests in retail property in recent years and shortly it will announce major acquisitions in the commercial sector.
Mr Chowney says local property agents are aware the council has an interest in acquiring property and lets them know what is coming to the market with each opportunity being weighed up carefully before any decision is made, “…we reject a lot that is suggested to us,” he says.
Mr Chowney says he is confident that HBC is taking all necessary steps to ensure its property dealings are sensible and carry minimum levels of risk.