Winning in the rollercoaster business of commercial property development is hard. Look at the share prices of the two FTSE 100 titans, regarded as the most diversified and solid operators in the sector. Since the financial crisis of 2008-09, which caused commercial property prices to crater, Landsec’s shares have been as low as 350p and as high as £13 and are currently 626p. British Land’s trajectory is similar.
Their investors collect dividends (most of the time), largely funded from rental income, but they also know that the value of the assets can be volatile. Less diversified firms have done much worse. Intu, a former shopping centre giant, collapsed in 2020 and an air of financial crisis has hovered over Hammerson for years. This is territory for conservative financing and strong risk-management safeguards.
It is not the sort of place, you’d think, for a small borough council in Surrey to borrow up to the eyeballs and take a concentrated investment punt in an attempt to offset a squeeze on budgets elsewhere. But read the section 114 notice issued by Woking borough council this week – in effect, a “we’re bust” document – and be amazed at the numbers.
On one hand, the council is projected to have core funding – meaning receipts from council tax, business rates and government grants – of £16m in the current financial year. On the other, it had a debt portfolio at the end of March of £1.8bn (yes, billion) thanks to an adventure into the world of skyscrapers and hotels, chiefly a 34-storey building complete with four-star Hilton hotel in the town centre that has plunged in value. A loan impairment charge of £600m-plus is on the cards.
To cap it all, the council was found to have under-calculated its “minimum revenue provision” – sums that should be set aside annually to repay the principal loan in order to protect future council taxpayers – all the way back to 2007-08. The under-provision wasn’t a rounding error. It will mean additional charges of £95m this financial year and an average of £75m thereafter.
Versus its council tax receipts, Woking is thought to be the most indebted local authority in history, beating even the tiny Spelthorne borough council, also in Surrey, where crisis hit in 2020 after a £1.1bn investment spree. This line from Woking’s 114 notice captures the size of the mess: “If the additional charges of circa £75m in each year were to be funded by service reductions, this would mean the council could no longer afford to provide any services at all and would still see a net budget shortfall.”
Local residents should expect an increase in council tax bills, but some form of central government bailout looks inevitable.
How did it happen? Well, the general backdrop is well known. The pre-2020 arrangements via which local authorities could fund investment by borrowing from the Public Works Loans Board (PWLB), which these days sits within the Treasury, were notoriously loose. Back in 2020, the public accounts committee warned of a disaster in the making as Covid whacked commercial property prices after a 14-fold increase in local authorities’ borrowing for investment in the previous four years.
The government “has been complacent while £7.6bn of taxpayers’ money … has been poured into risky commercial property investments,” said the report. Lending criteria, or at least policing of the “prudential framework” that councils must consider, was tightened.
In Woking’s case, the 114 notice shows the council had advanced the colossal sum of £1.3bn – money borrowed from the PWLB – to joint venture companies, notably Victoria Square Woking Ltd, in which the council held a 48% stake and a Northern Irish developer, Moyallen Holdings, held the majority. Then the value of the assets fell.
But does misguided ambition plus bad luck with the pandemic explain the full extent of the mess in Woking? Local taxpayers will surely want fuller answers to matters only briefly described in three paragraphs of last month’s 47-page review of Woking’s finances by the three commissioners appointed by the Department for Levelling Up, Housing and Communities.
Investments by the previous leadership “were made with little provision or consideration of council capacity and capability to manage these programmes effectively and efficiently,” it says. Presentations to full council were “very high level and there is little evidence of the commercial risks that members would be required to consider.”
The previous chief executive, it goes on, was given delegated responsibility to spend up to £3m on regeneration projects “without formal recourse to the executive or council”. It describes such a delegation as “very unusual”.
The next paragraph says the council acquired several parcels of land in 2015 and 2016, and states: “Enquiries to date indicate the paper trail is limited in respect of valuations, shareholder directions and company board minutes for the acquisition.” After “content redacted for commercial sensitivity”, it goes on: “It is unclear whether some of this land was acquired at market rate based on a robust valuation to ensure value for money.”
One hopes the commissioners will be more expansive in their next report.