Late last month, Shropshire Council concluded its controversial deal to purchase three Shrewsbury shopping centres from an offshore trust. The price was £51 million. The Shropshire Star called the deal “an extraordinary and historic purchase” and described the council as “brave”. Bravery is one thing but I suspect this purchase to be unwise. If I had £51 million in my pocket, I wouldn’t invest it in shopping centres. I’d use the money to improve the social fabric of our county by building council housing.
The background to the purchase is the reality that Shropshire Council has long been revenue poor and capital rich. (My earlier article explains why councils cannot use capital funds to support underfunded local services.) Before this purchase, the council had more than £100 million in capital funds in the bank or out on loans on low rates of interest. This has come from the recent sale of assets, such as Stone House in Ludlow, and from reserves held by the former district councils.
The core funding from central government for Shropshire Council’s operation is being reduced to zero by around 2020.[1] That means the council will have to rely on income from business rates, council tax and whatever other sources it can find.
The shopping centre deal will mean that the council will get a guaranteed income of £2.7 million from the shopping centres next year. That, I believe, is the main driver for this cash strapped council purchasing the centres. Council leader Peter Nutting said:
“The investment in the shopping centres is very exciting and hugely important. It will provide us with the opportunity to shape the redevelopment of a large part of the town centre.”
Although there is talk of turning Riverside into a car park, we have yet to see any plans, even the most basic sketch, for redevelopment of the area. Peter Nutting told Radio Shropshire that it is necessary to take a 50-year view on the purchase. We haven’t yet seen that 50 year vision. In any event, 50 years is a long time in retail. Britain’s earliest shopping centres are only around 50 years old. I have no idea what is going to be around in 50 years’ time and neither has Peter Nutting.
If the shopping centres are profitable, why is the offshore company that owns the shopping centres walking away from them? To me it looks like the previous owners offloading their stock at a time when the future of high streets is uncertain in the face of competition from online sales and out of town retail parks.
Our county town is, without saying, vital to our county’s economy. We need a vibrant county town. But these three shopping centres have long looked a commercial liability, especially after Shropshire Council permitted out of town retail areas.
The purchase is part of part of an accelerating trend among local councils to purchase commercial property portfolios to boost their flagging incomes. There is no shortage of critics of this trend. The Financial Times quoted financial experts cautioning that local authorities are investing in volatile markets at a time when the commercial sector is changing rapidly. Politicians have warned: “Local authorities have a long and inglorious history of gambling in financial and property markets.”
Cash is so tight that, a couple of years ago, the Local Government Association warned that around a dozen councils were at the brink of bankruptcy. That prediction is looking scarily real after Tory run Northamptonshire County Council announced this weekend it is now in the local government equivalent of administration and has frozen all but essential spending. Fortunately, Shropshire Council is not in such dire straights, despite having kept council tax frozen for the first six years of its existence.
But it is slaughtering services and taking money from the poorest to keep itself afloat.
Councils of all parties, desperate to convert capital funds into revenue to pay for services, remain tempted. In 2016, they spent £1.3 billion on commercial properties, more than the total for the preceding 15 years. Across the country, councillors are buying shopping centres, office blocks and hotels, not all in their locality.
Council decisions rely on advice from consultants and this is never published. But we must remember that consultants were urging investors buy right up to the bursting of the dot com bubble fifteen years ago. And they didn’t see the 2008 banking crisis coming. As financial guru Warren Buffet once warned: “You don’t see who is swimming naked until the tide goes out.”
The good part of Shropshire Council’s investment in the shopping centres is that the buildings are in its locality. But I don’t think this is best way of spending our capital funds.
We should instead invest in council housing. This would bring a stable, long term financial return and provide people in a low income county like ours with a home they can afford. A secure place to live promotes health, reducing the cost to the NHS. This will help people secure education and work, increasing tax income, and reduce the housing benefit paid to those struggling financially.
Alas, the attitude of the Conservatives toward council houses is that they are for selling. In the last six years, £3.5 billion has been spent subsiding the Right to Buy. That has led to 55,000 homes being flogged off. The government’s strictures on council’s finances means that only 12,000 are being built to replace them. Four in 10 properties sold under the Right to Buy are now owned by private landlords, rather than the tenant that bought the property.
Councils must invest their capital, and if necessary borrow, to gain an income steam to pay for the soaring costs of essential services. But they should invest in the social fabric of the areas they represent, not take high risk gambles on commercial ventures they have little experience of.
Notes
[1]. The Revenue Support Grant from central government is due to be abolished. Local councils will also be allowed to keep 100% of the business rates they raise, compared to around 50% now. But they will not be allowed to raise business rates to increase income. Similarly, the amount that council tax can rise each year is capped.
If a commercial company, with all it’s experience and expertise, cannot make this shopping centre a profit making enterprise I do not have any cofidennce in a collection of coucillors can do as well, or indeed any better. It is ludicrous, ie bonkers. They have talked themselves into it…… we need some down to earth thinking in this situation….none is forthcoming!
The only reason that a commercial company want to dump its business is because it is not making enough profit.
Haven’t the Cons learned anything from the Keith Barrow fiasco/farce/cock-up?
Social housing is desperately needed throughout Britain, but when did the Cons think that “social” had any priority over their tax avoiding donors?
A ‘typo’ in Andy’s last paragraph says: Councils must invest their capital…….. to gain an income ‘steam’…… Steam as we all know, quickly evaporates!
And is Shropshire SERIOUSLY contemplating spending over £1 million on legal and other costs implementing parking changes ? Surely at a time of financial stringency that is utterly unnecessary?
PAUL … I missed your well spotted “STEAM”, but SO agree with your definition.
Which is another reason for why I am getting increasingly afraid of the future I foresee for our two generations of off-spring.
Equally, my belief in the lack of ACCOUNTABILITY of officials and politicians to ordinary citizens and taxPAYERS (and 5-yearly elections are NOT accountability) to forestall obvious outbursts of stupidity, means that all we can do is observe, fear, and pay!