Rising interest rates mean shops and retail parks are not helping fund public services
Somerset Council is not making as much money as hoped from its inherited 'commercial portfolio'
Last updated 9th Aug 2023
Shops, retail parks and offices - now owned by Somerset Council - are no longer helping fund public services as a result of rising interest rates.
Somerset’s four district councils – Mendip, Sedgemoor, Somerset West & Taunton and South Somerset – spend more than £200m between them buying up commercial property, using the rental income to pay for public services.
The new unitary authority – which was formed in April – inherited the complete investment portfolio (along with the limited investments made by Somerset County Council) and has been reviewing the portfolio to ensure taxpayers were getting value for money.
But officers have now admitted that the recent rise in interest rates mean that the returns from these investments are less than the original borrowing which is being repaid – meaning they are currently providing no net income.
Jason Vaughan, the council’s chief financial officer, admitted this fact at a meeting of the council’s corporate and resources scrutiny committee in Taunton on Tuesday morning (August 8).
He said: “To cover the short-term borrowing we inherited, we’re now doing internal borrowing. The whole portfolio is now costing rather than generating income.”
The previous council invested a total of £290m in investments, with the individual capital value of the assets ranging from £1.2m to £22.2m.
The estimated value of the investments has already dropped to £265m, or by around five per cent, which officer said was “broadly in line with the slight softening in the market”.
The investments varied greatly, including retail units (such as the Wilko and Marks & Spencer stores in Yeovil town centre), offices (including several sites in Bristol), business parks (including Street Retail Park in Street), housing developments (such as the conversion of a former care homes in Marlborough) and battery energy storage facilities near Taunton and Fareham.
Of the 48 properties which were purchased, only 12 are located in Somerset – just 25 per cent of the total.
Seven of the properties are currently classed as ‘voids’, where the council is seeking to re-let the premises following the vacation of a previous tenant.
The commercial investments were made at a time when interest rates were at historic lows, with councils across the UK being able to borrow at a lower rather than the commercial sector through the Public Works Loans Board (PWLB).
The PWLB (which is part of the UK Treasury) changed its policies in March 2021, restricting the criteria for which local authorities could borrow money.
Somerset Council has managed to negotiate an exception to these rules with the Treasury, on account of being a new authority – but there are still limits on how much can be borrowed and for what purpose.
While the gross investment return on the commercial properties is currently seven per cent, this drops to 2.23 per cent once the cost of repaying the borrowed capital funding and other fixed costs are taken into account.
With interest rates currently sitting at 5.25 per cent, following recent decisions by the Bank of England in its bid to combat inflation, the returns on the council’s investments are less than the amount it is needing to repay each month.
Councillor Ros Wyke, portfolio holder for economical development, planning and assets, said work was being done to review the entire portfolio to ensure that taxpayers were getting a fair deal.
She said: “If you look at the finance paper which went to the last full council, there are 17 actions we agreed, including a review of commercial assets. The work is ongoing as we speak.
“We need to learn, but starting to point fingers in a negative way may not be helpful.”