A Devon council could spend up to £75m buying commercial property in the county to earn some extra cash.
In a bid to make up for a shortfall in Government funding, West Devon Borough Council has already set aside £35m of borrowed cash to plough into commercial property – and could borrow up to £75m.
The council is the latest in a growing number borrowing cash to splash on purchasing buildings to cover a funding black hole.
They are even allowed to invest the money outside of their council patches, as authorities are not constrained by where they spend.
This has led to one council even purchasing a hotel almost two hours away from its area.
There is speculation that an authority such as West Devon, which is set in a mainly rural area, could look to its neighbouring city of Plymouth for investment opportunities.
The council stressed it has made no decision on where to put its cash, as yet, only that it has a pot ready to invest.
It said it is looking at commercial property that could generate a profit as part of a “commercial property acquisition strategy” approved in 2017.
In July the council agreed to borrow up to £25million, out of a possible £75million, as part of an initial phase to acquire property and thus generate income streams.
At a meeting of full council in December 2017, WDBC agreed to increase the size of this initial investment purse by £10million, plus the associated acquisition costs which might need “more flexibility” as it searches for suitable properties to snaffle.
Cllr Philip Sanders, WDBC leader, said: “So far we have not made any purchases but we have considered a number of opportunities.
“What has become clear to us is that in order to secure property we need a little more flexibility to enable us to get the right deal for us.
“This agreement gives us the flexibility we need to kick-start this project.”
The property acquisition strategy was discussed by WDBC before a decision not to create a new council by merging with its South Hams equivalent was binned in November 2017.
That decision does not change the property strategy “in principal”, the authority said – but it does make the need to generate income streams “more urgent”.
The property strategy will see the council borrowing money to purchase commercial property with established tenants in place.
Once all costs are taken off, this strategy could deliver a £450,000 surplus which would be used to fund services within the borough, the council said.
The trend in councils borrowing to invest comes as heavy cuts in central government funding have left councils having to consider increasingly creative solutions to ease financial constraints.
Between 2010 and 2015, there was a 37 per cent cut in real terms in central government funding to councils.
So authorities have looked to borrow from the Treasury-run Public Works Loan Board (PWLB) at rock bottom interest rates and plough the cash into commercial property ventures that can offer returns of as much as eight per cent.
In June 2017, Plymouth City Council bought the huge Royal Mail centre at Plymstock so it can rake in £325,000 a year in rent.
The authority splashed out an undisclosed but “significant” sum for the Royal Mail Regional Mail Centre, which meant the city council saw its investment portfolio rise to in excess of £130million.
Every year an average of about £10m in rent comes into the authority from these properties, which range from small shops and retail parks to industrial estates.
Tim Western, a director at leading commercial property consultancy JLL, which advised the city council on its Royal Mail deal, said across the South West local authorities are hungry for investments.
He said councils bought more than £1bn of property across the UK in 2016.
He also said councils are investing in business developments outside their patch, particularly if in a rural area with little to sink their cash into.
He said West Sussex County Council is involved in the £20million Aztec West Business Park – in Bristol.
He said: “Across the UK we are now seeing local authorities buying properties outside their patches if it gives them the best return.
“We may see more of this across the region.”
However, some experts are worried by the borrowing-to-invest trend, with former Business Secretary Sir Vince Cable warning the strategy risks creating a bubble that could bankrupt local authorities.
Source: Devon Live