The British government has banned local authorities from buying up investment property after a near-£7bn spending spree left many councils heavily indebted and at the mercy of a downturn caused by coronavirus.
Over the past three years local authorities have tapped £6.6bn from central government in low-cost loans to invest in property. That is 14-times the amount accessed over the previous three year period, according to the parliamentary public accounts committee.
The Treasury announced on Wednesday that it was tightening the lending criteria to prevent councils tapping the Public Works Loan Board as a source of cheap finance to fund risky bets.
Before any loans from the PWLB can be signed off, local authorities will now have to “confirm that there is no intention to buy investment assets primarily for yield at any point in the next three years”, according to the government statement.
Councils turned to property investing as a way of trying to generate income without increasing council tax, after deep cuts to local budgets over the past decade.
But the speculative practice has left a number of authorities exposed to the pandemic’s destructive impact on the property market. Since coronavirus broke out in the UK in March, the value of shops, cinemas, bars, leisure centres and offices have plummeted and rent payments have dried up, as retailers and hospitality businesses have been forced to close.
Earlier this month, Croydon council in south London announced it could not balance its budget after investing in a shopping centre, a hotel and a number of housing developers. The council’s debt load has doubled to £1.8bn in the past three years.
Under the new rules for accessing the PWLB, authorities will also be asked to lay out their planned capital spending and financing plans for the following three years.
The Treasury said its aim “is to develop a proportionate and equitable way to prevent local authorities from using PWLB loans to buy commercial assets primarily for yield, without impeding their ability to pursue service delivery, housing, and regeneration under the prudential regime as they do now.”
But the Local Government Association, the membership body for local councils, warned that tighter lending criteria might make it hard for authorities to access loans for the delivery of legitimate projects, such as delivering new homes.
“These plans will throw into doubt the future of programmes which help deliver on key government priorities, such as housing and regeneration,” the LGA said.
In an attempt to ensure the PWLB remains an attractive source of finance, the Treasury also said it would cut the interest rate on new loans from the fund, once satisfied those loans were not being used to finance property investments mainly intended to generate a yield. That reversed an October 2019 rate rise, which was designed to dissuade local authorities from borrowing heavily to invest in property.