Posted: 16.03.20 at 11:55 by Daniel Mumby - Local Democracy Reporter
One of Somerset’s councils has seen the value of property in Street it has invested in fall by almost half a million pounds in one year.
Sedgemoor District Council, like other local authorities across the UK, has been purchasing commercial property to generate revenue to fund front-line services.
But valuations of three of its largest investments – including a retail park in Street – have decreased.
A council finance boss says the declines were not a cause of any immediate concern, and reflected changes to the basis on which properties are valued after they are purchased.
Last month, the National Audit Office (NAO) recommended changes to how local authorities manage the risks associated with their investments.
The council has five commercial properties in its investment portfolio, which cost nearly £30.5 million when they were originally purchased.
It purchased the Street Retail Park in December 2018 at a cost of £8.264 million.
But the property is now valued at £7.77M million – a loss in value of £476,000.
Similarly, the council’s investment in the TKMaxx store on Worcester High Street has declined from £8.526 million to £8.15 million since its purchase in April 2019 – a reduction of £376,000.
A third investment – the Applegreen petrol station on Gloucester Road in Bristol – has declined from £2.345 million to £2.280 million since being bought in mid-2019.
This last reduction – of £65,000 – brings the total fall in the value of the council’s investments to £917,000.
Two additional investments – a unit on the Sowton Industrial Estate in Exeter, and a unit on the Aztec West business park near Bristol – have not changed in value since they were purchased (for £3.908 million and £7.457 million respectively).
The council is currently looking at a potential new investment (whose nature and location has not been publicly released) for £5.27 million.
The losses were confirmed in a report published before the council’s executive committee meeting in Bridgwater on Wednesday (March 11).
Alison Monteith, the council’s finance manager, reported that these losses were not a cause of any immediate concern.
She wrote: “We invest in UK commercial and residential property with the intention of making a profit that will be spent on local public services.
“The total cost of purchases include all expenses such as tax, legal and consultancy fees.
“When the property is subsequently valued, it is on the basis of investment yield. It can sometimes take several years for the valuation to match or exceed the original purchase costs.
“We assess the risk of loss before entering into and whilst holding property investments by carrying out a full due diligence exercise, including looking at the business plans and taking advice from external advisers.”
In a report published on February 13, the NAO said there was “room for improvement” when it came to how local authorities manage and mitigate the risks associated with investing in commercial property.
The report said councils’ recent activity had “raised questions” about the government’s existing guidelines on local authority debt and borrowing – and by extension, the value for money being provided to the taxpayer.
NAO head Gareth Davies said: “Local authorities have responded innovatively to the challenge of funding constraints, with some investing in commercial property to secure additional income.
“However, the benefits from this investment must be considered against the potential risks to authorities, particularly given the concentration of this activity and associated borrowing within a relatively small group of authorities.
“The government needs to look again at the framework which governs local authority borrowing and investment and consider whether it is still fit for purpose.”