South East councils need to take a risk

Greater London and South East-based local authorities trying to deploy capital for income generation projects, however, are finding opportunities few and far between.

Due to an all-in funding cost for local authorities when borrowing on acquisitions, consisting of the interest rate charged by the Public Works Loan Board (PWLB) and internal accounting costs of 4.5%-plus, and the fact that well-let modern assets are transacting at low 4% yields, they are having to move up the risk curve or seek opportunities in other sectors to deploy capital.

Initially, the concept of local authorities moving into the development sector may seem too high risk for their investment needs, but if strategic sites can be brought forward within their own boroughs, the risks could be mitigated and income returns enhanced. Any proposed development strategy would require the local authority to consult local businesses to identify key employers for whom they can develop new premises, by way of a pre-let on a long-term lease, subject to sufficient financial standing of the business.

Demand in the South East and London remains strong within the 5,000 sq ft to 20,000 sq ft bracket, given the distinct lack of stock available. The result is increased demand from a mix of SMEs and last-mile delivery businesses, which would take space should it be delivered.

A successful implementation would provide numerous benefits to a local authority including additional business rates, retention of businesses and employment within the area and ownership of modern industrial assets, which should provide a sought-after and liquid asset as well as a likely income yield in excess of 6%.

The obvious barriers facing a local authority are a lack of specific expertise, ownership of land and, primarily, the lack of capital to fund development.

Solutions, however, are now beginning to become more commonplace as private sector joint ventures and even the creation of standalone development companies by local authorities bridge the expertise gap.

A clearer and considered local planning policy is identifying land and uneconomic assets, a number of which are owned by local authorities and are then primed for future development for employment uses.

The lack of capital for development can also be resolved by borrowing from the PWLB. If a local authority is able to secure a pre-let to an existing business within its borough, the period between drawing funds and income received could be very short.

This approach may not be appropriate for all local authorities, but it may provide a longer-term solution than acquiring in the market.

Philip Colman is divisional partner in the investment team at Glenny