In the absence of a normally functioning shopping centre investment market, talk has been generated by the dominant buyer of this asset class in 2016: the local authority.
Ellandi’s research indicates that of a total of 28 shopping centres transacted so far this year, eight have been acquired by local authorities. The total value of over £350m is 17.5% of a market which has seen turnover halve from 2015.
We have a unique depth of insight into this rapidly evolving market – firstly, through our daily interactions with the 30 local authorities represented in our portfolio, and secondly from a piece of research undertaken on our behalf by Development Intelligence.
Our first finding is that the colour of the flag above the town hall does not determine whether local government believes it has the entrepreneurial flair to become a property investor. What matters more is whether the local authority has a strong executive function and a stable political power base. Where one party has maintained control over the medium to long term they are more likely to be activist investors.
The extent of local authority purchases has now given rise to concerns from the Commons Public Accounts Committee, as reported in the Financial Times, suggesting that “council officers may lack the requisite commercial skills” and that “taxpayers could suffer” if this new investment drive is poorly executed.
Bill Grimsey took an even more politicised slant in The Guardian, accusing councils of being “municipal mercenaries” looking to “make a quick buck”.
But what is driving this recent rush into property investment?
It has often been said that many investment decisions are driven by either greed or fear. In this case it may be a bit of both.
Many councils fear their ability to continue to offer the basic level of social services as a result of average cuts in income of 25% over the last five years, something that will only get worse despite chancellor Phillip Hammond turning his back on his predecessor’s austerity drive.
In an attempt to fill this shortfall, many local authorities are turning to the Public Works Loan Board. Here they can borrow money via “prudential borrowing” at rates the commercial market could only dream of to buy income producing assets to fund their day-to-day running.
While many decisions are assumed to be active interventions in town centres, as can be seen in locations as diverse as Cramlington and Newton Abbot, the acquisition of Addleshaw Goddard’s new headquarters in Leeds by the city council at a yield of over 6% can only be seen as an income play when your cost of funds is more like 2%.
But is it fair to suggest that local authorities don’t have the skills, or are being mercenary?
One of the councils criticised by Grimsey, Eastleigh, are the long leaseholders of The Swan Centre, which Ellandi owns. As always before purchase, we met with the council leader and chief executive. We heard their plans to buy a vacant building and relocate the council office back into the town centre and were impressed by their active investment programme that has seen a hotel and M&S Simply Food brought into the borough.
There is nothing short term or mercenary here. Knowing that the local authority has their interest aligned with yours makes town centre investment decisions far easier for the private sector.
However, in our experience, a local authority’s level of expertise and appetite to partner with the private sector differs from town to town. One told us they wouldn’t buy a shop without an asset manager, whereas some feel they can deliver optimum outcomes on shopping centre assets quite adequately using their estates team and a letting agent.
As you can see, it’s a very mixed picture. To further promote dialogue and best practice, retail property body Revo is planning a series of engagement activities over 2017 to bring together local authorities and the private sector.
It is an initiative that Ellandi very much supports.
Mark Robinson, property director, Ellandi
