PWLB ban is ‘nail in the coffin’ for out-of-borough investment

Local authorities have lambasted sweeping and sudden reform to the Public Works Loan Board, which has been branded the “nail in the coffin” for out-of-borough property investment. Last week, the Treasury revealed changes to public lending that overnight would block new public loans for so-called “debt-for-yield” commercial property investment. This means that if a council’s capital plan involves making an investment primarily for yield, the councils cannot turn to the PWLB. The National Audit Office estimates councils spent £6.6bn on commercial property in the three years to 2018-19. Some £2.5bn of this was outside borough boundaries. But, councils are now faced with an ultimatum – PWLB loans at a reduced 1.8% interest rate without commercial property investments, or continue investing without them. Kevin White, partner at Montagu Evans, says that “effectively, it’s just the final nail in the coffin for out-of-borough investment”. “Whichever way you turn there are going to be issues coming out of this,” says Sharon Taylor, leader of Stevenage Borough Council. “We’re hemmed in on all sides at the moment. Our other income has taken an absolute hammering during the Covid crisis and it is unlikely to recover.” Taylor says there is widespread concern and as councils wipe commercial property investment plans from their capital plans, she notes there will be forced sellers at potentially “the worst possible point” in the market. “We feel we’ve been encouraged by government to make up for the gaps. Most of us don’t get any revenue support grant anymore so we’ve been encouraged to find other ways of generating income,” she says. “There are one or two outliers, but many of us have focused on investing to support our local economies and that’s even more important now we are heading into the recovery phase from the pandemic.” Stevenage has one commercial property investment, but had ring-fenced finance for future investments to generate income. “We would have expanded the programme; at the moment it’s just difficult to see how these holes in revenue budgets are going to be filled,” says Taylor. The response from the Local Government Association has been consistent throughout the consultation. It says: “There is a danger that this will make it difficult for local authorities to continue to access PWLB borrowing to support service delivery including housing and regeneration, or to refinance existing debt.” White points out that the new measures could pose a number of challenges in the short-term. “The guidance doesn’t go into the nuances and subtleties,” he says. For instance, there is no guidance for councils looking to invest in assets or regear leases to divest of yield-led property. It also prevents diverse property portfolios and stable returns. “There is an irony in stopping them investing, it almost starts to push up the risk curve, because regeneration is much less likely to deliver a return. Yes, you have much better outcomes, but those outcomes have to be not purely financial.” The Chartered Institute of Public Finance and Accountancy has long called for restrictions on commercial property borrowing. Associate director Andy Burns says: “CIPFA has always been entirely clear that the Prudential Code prohibits borrowing to invest in commercial assets purely for yield. “The requirement to submit three-year overviews of capital spending plans in order to access PWLB funds supports the need to drive down the minority of councils investing for profit without overriding the enabling spirit of the prudential framework.” For those that no longer borrow from PWLB, there are alternatives. A 1% interest hike last year saw some turn to the municipal bonds market. Lancashire County Council has sought to raise finance via the UK Municipal Bonds Agency to replace maturing loans, with two bonds of £350m in March and £250m in August. Plymouth City Council is also venturing into the controversial financing mechanism of interest rate swaps. However, councils committed to alternative sources have already been burned by the sudden PWLB interest rate slash, alongside the wider challenges in the Treasury’s response. The UKMBA pulled a £250m bond planned for Warrington Council in the days after the policy change, citing uncertainty created over the new restrictions. “Councils have made plans based on assumptions about access to money,” adds White. “A lot of them will have made assumptions about some investment income and almost inevitably some of those will have made an assumption that there will be more acquisitions to help fund frontline services, and that can’t happen now.” To send feedback, e-mail emma.rosser@egi.co.uk or tweet @EmmaARosser or @estatesgazette Picture: Spelthorne Council’s Porter Building in Slough