Councils’ disastrous journey into commercial property investments
English councils collectively went on a near £7bn commercial property buying spree, a journey which has now proved to be responsible for bringing some of them to the edge of bankruptcy.
Their commercial investments, often made at huge distances from their boroughs over the last eight years or so, involved the purchase of office and industrial buildings, shopping centres, cinemas and even solar farms.
And despite their impressive looking multi-page strategy documents justifying their investment cases, many of which are still available on these council’s websites, the edifice eventually came tumbling down.
In the case of many of these councils it has led to budget cuts to many services, redundancies, fire sales of council properties and an appeal to central government for bailouts.
The whole sorry saga underscores the challenges commercial property investors face when trying to make money in uncertain times – Amazon, Brexit, Covid, higher interest rates and a struggling UK economy made sure of that.
Why did councils invest in commercial property?
The initial impetus was to offset the impact on local government service provision of central government funding cuts. The moves to acquire revenue-generating investments to fund council services gathered momentum among a small group of local authorities when they realised that they could borrow money at ultra-low interest rates. And that they could buy tenanted commercial properties producing “guaranteed” high cashflow returns.
According to one report in The Guardian newspaper, “Between 2016 and 2019, councils spent £3.1bn buying office developments, £2.3bn on retail property, including £759m on shopping centres, and nearly £1bn on industrial property – a 14-fold increase on the previous three years.
The cinema episode
One particularly disastrous episode has been the buying up of distressed cinema houses occupied by Cineworld Group plc.
Cineworld, a London stock market quoted Israeli based operation, and one of the largest cinema chains in the world, was facing significant financial challenges during the COVID-19 pandemic. As a result, some local councils saw an opportunity to purchase Cineworld cinemas both to secure a good income and to maintain them as local cultural hubs.
A few notable examples include Southend-on-Sea City Council, North East Lincolnshire Council (Grimsby), Brentwood Borough Council, Stoke-on-Trent City Council, Darlington Borough Council.
Cineworld’s disastrous expansion plans
Cineworld’s financial troubles began after it announced the acquisition of Regal Entertainment Group, a large U.S. cinema chain, for $3.6 billion. While the acquisition made Cineworld one of the largest cinema chains globally, the high level of debt became a major financial challenge, especially after Covid hit.
Even when the cinema closures across the globe began to reopen, audience numbers were significantly lower due to health concerns, restrictions, and a lack of blockbuster film releases. Plus, Cineworld’s efforts to acquire Cineplex, a major Canadian cinema chain for $2.1 billion led to expensive legal battles after the deal collapsed.
The upshot is, as with many other retail and office premise investments, councils are left with buildings whose values as far less than they paid for them, and they are either unoccupied or occupied with tenants, such as the cinema chains, paying little or no rent.
In many cases it pays landlords to leave commercial tenants in occupation even when they pay no rent to protect the owners of the buildings from all the other ongoing charges: business rates, insurance, utilities standing charges and security issues.
The Solar experiment
Thurrock Council residents are now paying the price for their council’s decision to enter the world of solar energy. The council invested nearly £400m in various schemes between 2017 and 2020 – money at the time it had borrowed at a low rate of interest from other local authorities. It placed a chunk into a company known as Rockfire Capital operated by Dubai-based Liam Kavannagh.
The council now claim that Kavanagh misappropriated at least £150 million of these funds when he suddenly acquired a private jet, a yacht, a £3 million property in Mallorca and a Bugatti Cheron sports car. It also seems that the unwitting underwriters of Kavanagh’s country pile, Ash Park Estate in Hampshire, are the unfortunate ratepayers of Thurrock.
While Kavannagh strenuously denies the council’s claims, he nevertheless purchased Ashe Park after he persuaded the council to invest £40 million into his now failed solar scheme. The episode puts Thurrock Council at the top of the podium of councils taking high risk gambles, driving them into financial ruin.
Not just the solar affair, according to the Sunday Times, Thurrock lost nearly £25 million on high interest bonds destined to fund medium-sized enterprises (SMEs), paying 8.5% interest, issued by a company named Just Cash Flow! Thurrock doesn’t seem to have picked up on “red flags” when at a time in 2016 interest rates were near zero, a seemingly impossibly high 8.5% return indicated a very high risk.
In this case it seems the council relied on a since-failed firm of financial advisers, not regulated by the Financial Conduct Authority, that judged the investment bonds “A-plus” on an asset recoverability basis.
The whole saga has left Thurrock Council, a Conservative led council at the time of the investments, now Labour led, fighting legal battles to recover at least some of its wayward funds. In the meantime, the ratepayers of Thurrock are seeing services slashed, assets sold at fire sale prices and their council tax increased by 20%.
This sorry tale is currently being repeated in many boroughs across the country.
