LAs : Oh Dear , Let's Gamble To Make Up The Shortfall ? 2 Pair ? Raise You £ 10 Million ?

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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.
Well I never !

Still at it , playing the borrowing / investing / hope for higher return game.

As predicted ... desperate times ... why not gamble ... a little ???? ... sebuilding

Councils to spend £1bn on commercial property amid housing shortage

Exclusive: Expert estimate suggests figure local authorities are on course to lay out this year could instead be used to fund 8,000 council homes

Councils are on course to spend more than £1bn on commercial property this year, investing more in shopping centres, country clubs, hotels, offices and other assets than in building council houses, figures show.

Town halls in England and Wales spent £758m buying up commercial property in the first eight months of this year, according to property market data from Savills, but are only building 1,730 council houses a year, government figures for 2016-17 show.

The £1bn councils are on track to spend could produce more than 8,000 new council homes, an expert estimate suggests. Earlier this year, Downing Street indicated that amount could deliver 12,500 homes.

While no nationwide figure is available for the total cost to the taxpayer of council houses built in 2016-17, expert estimates putting the cost per property at up to £125,000 would suggest local authorities spent in the region of £250m.

About 77,000 households in England and Wales are living in temporary accommodation and 1.2 million are on council waiting lists.

Council leaders are demanding that the government lifts the cap on borrowing for housing in the budget next week.

John Healey, the shadow housing minister, said: “It is absurd that out-of-date rules let councils borrow to build or buy commercial property, but not to invest in affordable housing.

“Conservative ministers are about the only people left who don’t think councils should be free to build new, low-cost homes to benefit their areas. It’s a budget no-brainer for Philip Hammond to lift this cap and get councils building tens of thousands of affordable homes.”

Coventry city council decided last month to buy Coombe Abbey hotel in a multimillion-pound deal, prompting protests from locals that it was doing so while making wider cuts. The local authority has no council housing despite rising homelessness, with more than 600 households in priority need. The council believes it can earn a 10% annual return on the investment.

Kingston council in Surrey spent £54m buying two office buildings and a business park in the last year, but only invested in one new council house, a former school caretaker’s cottage. Demand for social housing far exceeds supply and the borough has 9,524 households on an ever-lengthening waiting list.

The boom in commercial property investment dwarfs the amount spent on homes partly because central government restricts how much councils can borrow against their existing housing assets. However, the Treasury offers cheap loans that can be spent on commercial property. Councils have been using them in an attempt to create new income streams to fill budget holes left by Whitehall cuts.

Other councils’ recent commercial investments include a solar farm, and a shopping centre, cinema and bowling alley complex due for completion in 2020, in which Barnsley council invested £70m this year.

Spelthorne council in Surrey has spent more than £400m in the past 14 months on office buildings including the Sunbury-on-Thames campus of BP, and the headquarters of the contactless payment software company Verifone, located outside the borough.

The council said it made the latest purchase because “the withdrawal of funding for local authorities means that many councils are having to find new ways to fund services”. There is no council housing in the borough and it has warned of “very long” waiting times for housing, and said many people will not be housed.

Earlier this year, the Liberal Democrat peer Lord Oakeshott, who chairs a property management company, described the trend as “a gigantic game of Monopoly with taxpayers’ cash”.

Last week, the government warned that some councils were becoming overly dependent on commercial income to fund statutory services and could be left “financially exposed”. It is considering insisting that councils no longer borrow only to generate investment returns and requiring them to show councillors “understand the risks as well as the opportunities of investment decisions”.

The Department for Communities and Local Government would not comment on whether local authorities would be allowed to borrow more for council housebuilding.

“We want local authorities to deliver a new generation of council homes, that’s why just last month, we announced a £2bn boost to deliver more affordable properties at social rent in areas where they are most needed. We’re seeing progress, with twice as many council homes built in England in the past five years than between 1997 to 2010,” a spokesman said.

Martin Tett, the Local Government Association housing spokesman, said it was vital that the government lifted the cap on council borrowing to build homes.

“As a nation, we need to build more than 300,000 homes a year, and we’re currently building roughly half that,” he said. “The last time this country hit that number, in the 1970s, councils built more than 40% of new homes.”

Have to smile ... my banking past catching up with me yet again ... history repeating itself yet again ... 1973 .... and then 1974 ?

Set up beautifully ... gearing / low interest rates / pressure on tenants ... and then just one little factor added.

One which will run until it explodes ... probably more spectacularly than in 1974.


Note to my former employers.

After 26 years , how's about a grand a week for a few hours here and there on a consultancy basis ?

To clear up the latest mess all your young pups have left.

After all , we of that generation clearing up the mess in the early 70s saw it coming ... nobody in your outfit apparently did ?

We know what to do ... save you a small fortune in external legal / accountancy fees alone ... on second thoughts ... make that a grand and half ... washed through the usual channels ... British Virgin islands ... Manx £s ... I'll be able to reclaim the VAT on all purchases ... if they fly high enough and land on that pimple in the Irish Sea ???