Local Authorities & Property Investment - A Risky Bet or the Key to High Street Salvation – By Paul Miller

10th February 2021
In September 2019, the Guardian newspaper reported that one in five shopping centres bought since 2016 had been acquired by local authorities at an investment level of £1bn

Only eight months later Parliament’s spending watchdog had launched an inquiry into those commercial property purchases amid fears that the Coronavirus Pandemic had exposed councils to significant reductions in both income and investment values.

The Pandemic had effectively begun to create holes within Council budgets because of large-scale shortfalls in council tax income, parking and leisure fees.

Shopping centres were also experiencing reduced rental flows and increased management time created by business CVAs, the renegotiation of occupier terms and the cost of making some of those centres and parks COVID-19 compliant.

Prior to this, local authorities had seen the rise of the retail market and the advantages of property as an asset class being attractive for several reasons:

  1. Ownership of a tangible building asset at the end of the income period with future development potential.
  2. The belief that secure lease arrangements would provide binding contracts alongside improving income security.
  3. Above average returns when compared with bank/PWLB interest rates.
  4. Opportunities to renegotiate improved terms in response to more favourable conditions.

So why had these authorities entered the world of retail estate investment? This shopping spree of retail space and office buildings had been the result of councils wanting to increase their revenues to help off-set the impact of austerity measures introduced in 2010.

In addition, the opportunity to borrow cheaply had provided the funds, that alongside projected income flows, had looked to become a compelling business case.

The scale of investment reported from the National Audit Office (NAO) found that local authorities spent an estimated £6.6bn on commercial property over a two-year period between 2017 and 2019 compared against circa £500m during the preceding three years.

Out of this expenditure, £2.3bn had been invested in retail property of which £760m was spent on shopping centres. Whilst there were large sums spent on property assets throughout the UK, the retail purchases were generally located within the local authority’s geographical control.

It can be easy to criticise with the hindsight of a sharp decline within the retail marketplace and the economic effects of Covid-19, so the question now being asked, is how local authorities can begin to understand their property assets – or in some cases liabilities – to start thinking about reversing the declines in both rental income and investment value?

There is no doubt that reduced property income is now a big concern to those local authorities who have previously relied upon those monetary flows to help support public services.

This financial impact is now immediate with their occupiers falling away because of closures and administration, and many tenants seeking not to renew their leases or exercising break options.

The impact of these retail failures means that councils are now beginning to seek specialist support by way of appointing retail asset management organisations that can proactively guide local authorities on their property investments. As well as advising on the ‘here and now’, it is important that the future potential of the investment can also be fully explored to mitigate further losses and negate diminishing values.

So, what are the options that local authorities can look to consider?

Regeneration Investment

Older retail centres are unlikely to retain existing retail operators or attract mainstream brands, especially if located within secondary locations. In this instance it is generally about identifying re-investment into alternative uses.

Where these centres are located within or close to town centres then opportunities to re-invest can become a reality.

Stockton-upon-Tees is a good example of how the purchase of property assets within the centre has effectively kick-started their Riverside Park vision and redevelopment plans.

Plans have been tabled to tackle the town’s empty shops problem which along with the demolition of the Castlegate Shopping Centre and adjacent Swallow Hotel, would see the redevelopment of a site area of five acres. This aspiration seeks to create new offices and a waterside park, whilst providing uninterrupted access to the waterfront.

Delivering the vision would then shrink the town’s oversupply of retail space and relocate the primary shopping hub into the £7m council-purchased and now owned adjacent Wellington Square area.

The council is proposing to use £20m of Tees Valley Combined Authority funding to relocate the Castlegate tenants and carry out all the waterside construction works starting in 2022.

In addition, Stockton have recently been successful in attracting £16m from the Government’s £1 billion Future High Streets Fund, which is being targeted at seeking to renew and reshape town centres and high streets to drive growth, improve experience and ensure future sustainability.

Town Centre Partnerships – Sovereign Centros and Corby Borough Council

A good example of the public and private sector working alongside each other exists in Corby, Northamptonshire. This relationship has been an important component in the effective asset management of the town centre, with the challenge of building and maintaining effective business relations between Corby Borough Council (CBC) and Sovereign Centros.

Working with several senior officials including the Chief Executive, heads of estates and planning, housing and economic development, the Firm is helping to provide alignment between the aspirations of the council and the economic development of the retail provision and town centre.

Sovereign Centros has also been supporting CBC by participating as Board members on the Town Deal Fund.  This has helped promote and introduce town centre located asset initiatives for a recently submitted Town Deal Funding bid earlier this year.

The continual engagement between Sovereign Centros and CBC’s planning department has enabled a greater understanding on the vision for the future growth of Corby, and one that has been continually seeking to share ideas and constructive commentary on various development proposals that both parties are looking to promote.

The sharing of ideas, whilst also having a collaborative approach with such key stakeholders, is now so important to a successful town centre.  It serves to encourage investment into the town whilst offering a clear vision on its growth and development for future prosperity and increased footfall, attracted by a mix of compelling shopping, entertainment, residential and educational uses.

Summary

With the impact of Covid-19 and the demise of many well-known retail brands, these combined have now had a detrimental effect upon those local authorities who have previously invested in retail assets.

What were once income-producing property portfolios are now becoming financial liabilities that require intensive and specialist management time that is likely to stretch the internal resource of the property estate teams.

Councils now have significant roles in the re-purposing of their town centres. Seeking Government funding can be a long process and with no guarantee of securing the type of financial levels needed to deliver their vision.

In addition, internal local authority reviews of their existing space provisions are now leading to space rationalisation to encourage financial savings, whilst also looking at alternative use ideas for these future vacant buildings.

There is clearly a lot to achieve and this is where the importance of public and private sectors working together with the single aim of securing positive regeneration and sustained growth in challenging environments becomes so important.

The example of the Corby Borough Council partnership and the extensive shopping centre asset management and retail park experience that Sovereign Centros has, makes them an ideal partner for local authorities to consider when evaluating their retail assets.

Many have suggested the demise of retail and town centres. Our view suggests otherwise. Combining the local knowledge of towns and cities that councils have in abundance with a strong input from a private sector retail property management specialist, can support positive collaboration. This in turn can successfully redefine local authority shopping and town centres, thereby seeking sustainable solutions for the future security of our retail shopping and the wider community.