Council commercial properties: will the bubble burst?

By Darwin Friend, policy analyst


Prudence with taxpayers’ money should always be at the forefront of decision making by officials in local authorities. Yet this is often not the case. From six-figure pay packets for staff to millions lost on council owned energy companies, the wastage of public money is endless. After an investigation by the TaxPayers’ Alliance published in The Times, it’s clear this also extends to council commercial property.


Our investigation revealed that local authorities across the UK had commercial property empires worth £6.4 billion in 2020-21. This is more than the development costs of the UK's new aircraft carriers, HMS Queen Elizabeth and HMS Prince of Wales which came in at £6.2 billion. Spelthorne council stood out from the pack, having the most valuable portfolio at £959 million, despite their spending budget from central government and council tax being £10.9 million - almost 88 times smaller. The council was not alone in this regard, with a further 23 local authorities having larger portfolios than spending budgets. 


The data also suggested there was a regional element at play, as we can see from Chart 1. Five of the top 10 largest commercial property portfolios were in London and the South East including: Spelthorne; Woking; Southwark; East Hampshire, and Sutton. Put together these councils own commercial property worth more than £1.8 billion - more than the £1.6 billion in additional funding given to all councils to help them get through covid in April 2020.


The chart also demonstrates that small as well as large councils have significant commercial property portfolios. Oxford, a relatively medium-sized local authority, has one of the largest portfolios despite having a net revenue budget of £44 million in 2019-20. This compares to £628 million for Manchester. Council revenues clearly aren't impacting their spending patterns.


Chart 1: top 10 local authorities with the highest value portfolios, 2020-21

When we analyse portfolio values between regions it confirms the South East as the biggest spender on commercial property by a sizable margin. Chart 2 shows close on £3 billion in commercial property is held in the South East alone - more than £220,000 for each investment. This compares to a mere £52 million in the North East, with the average price of a property in, for example, Northumberland council being £71,261. 


Clearly the disparities are huge. Some of it may be due to property prices more broadly. The South East has the second highest property prices in the UK, while the North East has the lowest. In London, where the prices are highest, a number of councils refused to respond to our request for information - so these could be higher still. Nonetheless, the disparity between the amount of commercial property owned in the North East compared to the South East goes well beyond the property price difference. Property costs 2.5 times more in the South East, while council commercial property is 51 times more valuable than the North East.


Chart 2: total portfolio values by region, 2020-21

What about the money that these portfolios are supposed to bring in? When it comes to yields, there’s a mixed picture. East Staffordshire council had a portfolio worth £9.3 million, providing a yield of only 3.84 per cent - the lowest in the UK. South Holland council did well to receive a yield of 12 per cent on its commercial property, despite this being lower than the 15 per cent it had forecast it to make. There are cases, however, such as Amber Valley which had a yield of almost 147 per cent on its portfolio valued at over £1.5 million. Clearly some authorities are better at managing their investments than others.


Part of Amber Valley’s success was in the type of property it invested in. One of its properties included 10 industrial units which achieved a yield of over 200 per cent, with another industrial unit producing a yield of 29 per cent for the council. While the size of yields may differ, there is clearly a trend that industrial units typically provide a larger yield than forecast. Aberdeen, another council with significant industrial unit investments, saw yields of over 10 per cent for each unit.


The trend is consistent across the country. North Warwickshire saw every property achieve its forecast yield. Once again the majority of its portfolio was industrial estate property. The lesson for other local authorities may be: if councils want to invest in commercial property, industrial property seems a good bet. Note though, this is no guarantee of success with every industrial unit owned by Copeland yielding less than it forecast.


On a regional basis, yield information is harder to break down. This isn’t helped by local authorities not providing forecast yields, actual yields or both. For example, no council in the North East produced any yield information and no forecast yields were provided for all of Scotland. This is despite the latter owning 3,000 commercial properties - a third of the UK total.


For those regions which did provide information, more than half received lower average actual yields than they had forecast. Most notably, as chart 3 shows, is the East Midlands falling from an 18.6 per cent forecast to 9.6 per cent actual yield. It should be remembered that this is with success stories such as Amber Valley being in this region. 


Conversely, the South West saw its forecast yield almost triple in reality from 6.53 per cent to 17.66 per cent. Importantly, a single public house owned by North Devon council worth £500 produced a 2,500 per cent yield, which does distort the average yield percentage across the region. If only all council property could perform that well, we’d raise a glass to that!


Chart 3: average forecast and actual yields by region, 2020-21

So overall, local authorities saw a mixed picture with their property portfolios. We can’t say for sure though - because a number of councils decided to not provide information in response to our freedom of information requests. 


There were almost 6,000 properties which councils either didn’t know, hold or provide any yield information for. Most prominent was Slough council, which stated it hadn’t “undertaken a systematic programme of market and rental valuations for our commercial property for 2020/21 that would provide real forecast/actual yield.” This is rightly worrying for taxpayers, and let’s remember, this is the same council that declared bankruptcy this year.


When taxpayers’ money is used to purchase these properties, it should only be spent with a clear plan for commercial investments. But how can you have a strategy if you don’t even know what return the property should be making? How do councils’ financial wizards justify these investments to their elected councillors if they can't even provide basic information about how much money they bring in?  


On top of this, 75 councils (almost a fifth of all local authorities) refused to provide information because of commercial sensitivity. It means our total of £6.4bn is almost certainly an underestimate of the true value of council commercial property. 


Unsurprisingly, a number of the councils that used this reasoning were those which have not had sound finances recently. Nottingham City Council is one such case, with the authority being on the verge of bankruptcy. And another, Flintshire Council, is having to search for another £17 million to balance its books next year. Residents have a right to know how their council is spending their money and if the property is performing well against forecast figures. Otherwise, we cannot understand the scale of commercial investing going on in our local authorities - and the risks that come with it. 


With the data we do have though, we can say a few things. The multi-billion pound council commercial property portfolio has grown enormous. Councils, particularly in the South East, own enough for it to pose serious risks to their budgets if they went wrong. While some investments, such as perhaps industrial units, seem to offer good returns, this practice is never risk free. Before councils purchase commercial property they need to have a proper strategy, which does not result in local ratepayers’ having to cough up to pay for their mistakes. Because if this investment bubble were to burst, taxpayers could be left in dire straits. 


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