Highly Leveraged Commercial Real Estate Bets that UK Local Authorities Took to Meet Budget Shortfalls Begin to Unravel | Wolf Street

For the last two years, KPMG has refused to sign off the accounts of Spelthorne borough council, a tiny local authority on the outskirts of London that has taken on huge amounts of debt to buy more than £1 billion of commercial and residential property, it has been revealed. The council has an annual budget of just £22 million, yet it has amassed more commercial property than just about any other local authority in the UK, all of it debt financed.

A ruling against Spelthorne would not only put at risk the council’s entire £1 billion investment portfolio but could also have serious knock-on effects for dozens of other local authorities across the UK that have also borrowed heavily to fund property purchases, as well as other speculative investments.

Many of these cash-strapped councils invested in the commercial property market in order to offset recent spending cuts forced upon them by the central government. In 2018-19 alone, councils across England and Wales spent £6.6 billion acquiring offices and struggling shopping malls nobody else wanted – more than ten times the amount spent in the previous three years.

A recent inquiry by the Public Accounts Committee into local authority property acquisitions accused the government of turning a blind eye while councils ignored the rules and borrowed heavily to fund property binges. The Treasury said it would put an end to such practices, but has yet to deliver on the threat, reports the Bureau of Investigative Journalism.

Highly Leveraged Commercial Real Estate Bets that UK Local Authorities Took to Meet Budget Shortfalls Begin to Unravel | Wolf Street