LAs : As Predicted , Desperate Times Require Desperate Measures !

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Had to smile at this one , on my list of " Watch out for " events that would confirm the downward spiral. ... dit-bubble

Bankruptcy risk as ‘desperate’ councils play the property market

Warning from Vince Cable , former business secretary , of an " Iceland 2008 " type situation developing across many LAs strapped for cash , looking for way to plug existing / future holes in their finances.

I'll try to provide you with a simple explanation as to what's happening ( I spent many years clearing up the debris left from the Secondary Banking Crisis in the 1970s for a high street bank , and have continued to research over the years since ) :

Take any LA.
Projected shortfall of , say , £ 20 million for the next financial year.
Unable to cut anymore services , nor raise level of Council Tax.
So , how do they plan to erase the shortfall ?
Commercial property currently yielding , say 5 / 6 % per annum.
Borrowing to finance acquistions say , 3.5 / 4% per annum.
Difference on a best scenario .... 2.5%
LA go ahead and acquire £ 800 million worth of commercial property.
LA borrow 100% to do so , pledging property acquired and any other assets as security.
If all goes well , the difference between rent received and interest payable will be £ 20 million.

Now , all looks fine ... doesn't it ?

What could go wrong ?

If all LAs are doing the same , the price of commercial property will rise ... simple economics.
Yield gap immediately under threat.
Interest rates ... initially fixed term deals ... upto 5 years , possibly 10 years.
Pressure all round to raise interest rates ... perhaps to protect the GBP as a first priority ?
Economy ... growth slows as we are currently seeing ... uncertainty increases , asset values questioned.
Banks nervous ... seek to tightened up security behind borrowing ... anymore available ?
Tenant ? Say BHS ... considered to a " Blue chip " only a few years ago !
First year ... no problem. Oh dear ! Second year ... projected deficit £ 25 million ....

I hope you can see where this is heading .... and , guess who drew the shortest of straws back in the 1970s ?

Fingers crossed , reality might just click in before the next Crash ....

Nice view from that hill of mine , time to increase the rents in anticipation of a flood of new arrivals ???

Riders in the distance ... 4 horses ... white , red , black , pale ... time to raise my hay prices ???

Must have finished their work early ... this time of the year , either the Tyne or Wear ????

Surely no prudent LA finance officer would risk that amount of money?
Chris From The Gulag wrote: LA go ahead and acquire £ 800 million worth of commercial property.
Don't forget LA, to check the cladding.
Surely no prudent LA finance officer would risk that amount of money?
History is full of cases where people / institutions have borrowed more with the intention of cutting income deficits.

Even after 40 odd years , I still return to the 1973-75 Secondary Banking Crisis when reading ... just finished for the 6 / 7 th. time John Plender's " That Where The Money Goes " ... clearer now that it was when I had the first hand experience !

No , it is definately NOT prudent ... and yet , only time will tell when the first LA comes unstuck.