Shropshire Council has made a lot of controversial decisions. Many have reduced help for those that most need it. The council has also focussed on Oswestry and Shrewsbury at the expense of rural areas. That’s why it decided to spend £51 million to buy three shopping centres in closed session in January 2018. It has been a mixed picture since with some new retail units opening but a general trend of store closures and rent reductions. More taxpayer’s money is to be invested in improving the stores in a climate of declining high streets. The council continued to justify its biggest ever purchase at a meeting last week, claiming that the shopping centres have a rosy future. I hope so but the council could have better invested our money in improving the social fabric of the county by building desperately needed council houses. And I have doubts that the council can succeed when retail companies can’t make many high streets work.
Shropshire Council cut £10 million a year from its highways budget. It said this cut would be reversed when the shopping centres generate enough income. That doesn’t look likely any time soon as the shopping centres generate a pre-tax income of under £1 million.
Shropshire Council is trying to act as a big player in the property market in imitation of other councils. Many councils have become obsessed by buying property as a way of plugging the gap in their finances created by cuts of nearly 50% in government funding since April 2010 at a time when costs were soaring for adult social care and children’s services. The government has failed to reform local government finances. As Brexit paralysed Westminster, ministers dropped their own Local Government Finance Bill. They continue to cap council tax rises.
(I explain why councils can act as commercial companies below.)
The council did not need a loan to purchase the shopping centres. It had that much money in its capital reserves, much of which was inherited from district councils across the county when it became unitary in 2009 and sale of properties like Stone House in Ludlow. But the danger for council acting as a commercial company is that property values could fall. The UK is prone to recessions when its own economy or world markets get out of kilter. And the public is falling out of love with town centres going online or shopping out of town. Shrewsbury faces increased competition from Telford’s 25-acre indoor shopping centre.
Having shown interest in making a purchase, the council was pushed by the offshore trust that owned the centres into completing a rapid deal. Faced with deal or no deal, the council plumped for deal. In 2018/19, the centres provided a net income of £953,000. That’s a return on investment of under 2% a year. However, the council was guaranteed an income of £2.7 million from the shopping centres in the first year after purchase and that plugged an immediate hole in the council’s finances.
That short term gain cannot disguise the blunt truth that the council has purchased assets that are being progressively weakened by the challenges to high street trading and the council’s own actions in approving out of town supermarkets and retail parks on the outskirts of Shrewsbury. Next is one example. The clothing store has withdrawn from Pride Hill to consolidate sales at its Meole Brace store.
The value of the Shrewsbury shopping centres fell by £11m in the year after being purchased. The financial value of high street properties is falling across the country but for an asset to lose more than 20% in the first year suggests the council grossly overpaid. Council leader Peter Nutting, however, shrugged off the loss.
At Place Overview Committee last Thursday, officers said that the shopping centres are providing an income above that the council would have received if it had kept its (our) money in the bank. They also said the value of the shopping centres will rise in the long term. That will depend on further investment by the council. It has issued a tender for proposals for the future of the Riverside Centre and expects to start work on redevelopment of the area in late 2020. Also in 2020, it will invest mid-level mall of the Darwin Shopping Centre “to improve the environment and provide new customer facilities” as part of a £4 million upgrade.
The report to Place Overview highlights several challenges to the high street. Pay for shop staff increased after the introduction of the National Living Wage. Consumer spending has been weakening with the uncertainty around Brexit. And we buy more online at a time when rising town centre business rates put high street traders at a disadvantage against online retail giants like Amazon operating out of giant warehouses.
Retail chains are shutting up shop, entering Company Voluntary Arrangements or going bust. The retail offer in high streets is also changing. We buy fewer comparison goods on the high street. We spend more of our time snacking, dining and drinking coffee. Hairdressers and nail salons are replacing ironmongers and clothes shops. The council has failed to gain funding under government schemes to revive the high street.
The vacancy rate in the Darwin Centre is 9.3%. This is better than the national and West Midlands vacancy rate for retail of 13% for the first half of 2019.
I am concerned that no matter how bad trade becomes at the shopping centres in the future, no matter how far it has to dig into its pockets for renovations and conversions, Shropshire Council will paint a positive picture of how the centres are trading. Politically, the Conservatives have no choice but to do so. They can never admit that the council’s biggest investment has not been value for money if that proves to be the case.
Can councils be property companies?
The answer is yes. Local authorities are permitted to act like a commercial company using the General Power of Competence they gained through the Localism Act 2011. The spending spree on property that followed that Act has been funded from capital reserves or low interest rate loans. The aim of was to generate a long-term income for councils and make their finances less reliant on the whims of the government of the day.
By 2016, councils had spent £1 billion on property, mostly shopping centres, offices and business parks. That year, councils splashed out another £2.8 billion. In 2017, another £1.8 billion was invested. The Bureau of Investigative Journalism reported that some councils had borrowed nearly 50 times their annual income to invest in property. Spelthorne owes £1 billion and plans to increase its debt. Warrington’s debt has grown to £1.5 billion. Shropshire Council is fortunately not in this league.
Much of this spending spree has been made possible by loans from the Public Works Loans Board (PWLB). The Treasury became so worried about growing council debt it hiked interest rates from 1.8% to 2.8% last month. Take up of PWLB loans has plummeted since (£).
This is the broad background to Shropshire Council’s decision to invest around £51m in the three Shrewsbury shopping centres.