Treasury plans to ban councils from commercial real estate public loans

The government is exploring measures to block council borrowing to back commercial real estate, in favour of social housing and infrastructure. It will consult on revised terms for the £95bn Public Works Loan Board to prevent councils from buying commercial assets for yield. This will apply to any local authority planning any debt-for-yield scheme anywhere in their capital plans, including any local authority-owned company or joint venture. It defines investment assets bought primarily for yield as those acquired to let out at market rate, previously operated on a commercial basis and continued by the local authority without investment and assets other than housing which generate income and are intended to be held indefinitely. In the Budget 2020 proposals, it said: “In recent years a minority of councils have used this cheap finance to buy very significant amounts of commercial property for rental income, which reduces the availability of PWLB finance for core local authority activities. “To address this the government will consult on revising the terms of PWLB lending to ensure LAs continue to invest in housing, infrastructure and front line services.” The PWLB advanced 1,308 new loans, totalling £9.1bn, during the 2018-19 financial year. This has nearly doubled on the previous year, when it issued 780 loans totalling £5.1bn. As of March 2019, the PWLB held loan assets of £79bn. The government has increased the lending limit from £85bn to £95bn. According to Radius Data Exchange, councils have invested £7.5bn in property since 2013, with £3.5bn in offices and £2.4bn in retail and leisure. The top spenders have been Spelthorne Council with £947m, followed by Warrington at £472m and Surrey at £373m. Any new loan from the PWLB will require a “high-level outline of the capital plan” for the borrower, including assurance from the finance directors that the LA is not borrowing in excess of its need and will not be investing in commercial assets for yield. The Treasury will also remove the recent 1% interest hike for any loans dedicated to social housing, and has offered up £1.15bn in discounted loans for local infrastructure projects. It comes six months after the surcharge was implemented in attempts to curb local authority borrowing. At the time, the Local Government Association said the increase in interest rates could cost councils an estimated £70m a year, threatening vital council house building projects that would no longer be affordable and would have to be cancelled. The consultation closes on 4 June. To send feedback, e-mail emma.rosser@egi.co.uk or tweet @EmmaARosser or @estatesgazette