Why the collapse of one of the UK’s biggest property companies should ring warning bells in Muriel Matters House…
Two years ago Hastings Borough Council’s (HBC) rush to invest in commercial property was described as a ‘ticking time bomb of over extended borrowing’.
In the two years since, many voices both local and national have expressed growing concern at the way councils like HBC have been amassing debt on the back ‘investment’ schemes to acquire and then collect the rent from, commercial property.
Now in the wake of the economic shock caused by the Covid-19 crisis financial chickens could be coming home to roost. A council spokesman confirmed to Hastings In Focus, that HBC has tenants… “who are unable to pay their rents or business rates,” but stressed that the council is still, “able to manage the cashflow difficulties that result from Covid-19.”
We asked HBC how much the shortfall was but the council would not answer that question.
It’s estimated that HBC’s borrowings from the Public Works Loan Board (PWLB) in the last six years are approaching £70m on repayment terms stretching to 50 years in some cases.
Councillor Rob Lee, who leads the opposition Conservative group on the council said yesterday: “HBC has left itself in a vulnerable position after borrowing millions to buy commercial properties.
Commercial landlords received less that 20 per cent of their expected rent in June…
“For some years I have been advising against some of these purchases as they were risky and unwise. It will be the local taxpayer who will foot the bill for the largesse of the Labour administration and it’s spending spree.”
Last Friday’s collapse of Intu Properties, owner of some of the UK’s biggest shopping centres – including Lakeside – sent shockwaves through the property sector, coming as it did in the same week as figures were released showing that commercial landlords had received less that 20 per cent of their expected rent in June and owners of retail properties had received less than 14 per cent of the rents that were due to be paid.
A significant amount of the property owned by HBC is in the retail sector and includes businesses like Carpetright that only narrowly avoided collapse at the end of the year.
It’s also widely known that many retail businesses are in negotiations with landlords to have rents reduced. With HBC thought to be working on very tight margins it limits room for manoeuvre.
We asked HBC if it felt there was a need to review its activities in the sector and were told: “Currently all council projects and programmes are under review in light of Covid-19 and the council’s likely new position in terms of budget and resource.”
The spokesman said the council expects to publish its midterm financial review in September: “We are expecting a funding announcement soon from the government. This will inform our financial projections going forward,” he said.
Hastings’ MP Sally-Ann Hart says: “With the precarious nature of retail and the future of our high streets, I have always been sceptical of the cavalier approach that the Labour leadership of HBC has taken to purchasing retail commercial property around Hastings.”
The council borrows its cash to buy property from the PWLB which is backed by The UK Treasury. Its function is to lend money to local authorities.
While borrowing money to invest in property goes on every day in the commercial world those deals are overseen by property investment experts and professionals. Their livelihoods, reputation and their companies’ sheer existence depend on their ability to crunch the numbers, do the due diligence and then take a commercial decision based on their expertise.
When local councils decide to make such investments they don’t have that kind of specialist commercial knowledge.
Last year Peter Chowney, then HBC’s leader said the council made a profit of £740,000 per annum from its commercial property portfolio and that was vital to council finances. Many people feel that level of return on such significant investment is too small at that time it worked out at just 1.85 per cent.
The Chartered Institute of Public Finance and Accountancy has expressed its concern at the level of borrowing some local authorities have made in order to invest in commercial property and has gone as far as reminding councils that they: “…should avoid exposing public funds to unnecessary or unquantified risk”.
Another national investigation says: “Experts warn that commercial property investments are volatile, and the fact that councils are financing them through borrowing makes them even riskier. If anything goes wrong, the consequences for taxpayers could be severe.”
For some time Rob Lee has been worried that by spreading the repayment of the loans over several decades HBC is exposed to changes in the economy it cannot possibly predict and the Covid-19 has been exactly that.
In April the National Audit Office (NAO) said the framework governing capital investment by local authorities has been tested to breaking point by councils borrowing cheaply to invest in commercial property. It found the marked upswing in local authority investment in commercial property was concentrated in the South East, and district councils – like HBC – were disproportionately big spenders accounting for more than half of all commercial property spending from 2016 to 2019.
The NAO concludes: “In the context of sustained financial pressure, some authorities, perhaps inadvertently, will test the limits of compliance,” and goes on to recommend greater oversight on the part of central government.
We asked individual members of HBC’s ruling Labour group for comment but none was forthcoming. We were told by one: “Under the new leadership’s system you need to contact the council press office now, rather than councillors directly.”
Read more about HBC’s commercial property deals and then tell us what you think in the comment section below…