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Bankruptcy a Risk as Councils Gamble With Property Market

Former business secretary Sir Vince Cable has warned that councils throughout the country risk being plunged into a major financial crisis after investing  £1.5bn in the commercial property market.

Central government funding has experienced heavy cuts, forcing local authorities to consider increasingly unorthodox solutions to cope with their financial limitations.

Funding to local authorities has decreased by 37% between 2010 and 2015. One option that has been used to access much needed money has been to borrow from the Treasury-run Public Works Loan Board at decreased rates of interest. Council's have then been using those funds to invest in commercial property schemes that can bring of returns of up to 8%.

There are concerns that this approach is creating a bubble that could cause some local authorities to go bankrupt. Vince Cable, who was the business secretary in the Tory-Lib Dem coalition, said the investment strategy being undertaken by some councils was not wise.

He said that local authorities have a long and unsuccessful history of taking risks in property and financial markets. Hammersmith and Fulham Council encountered financial difficulties during the 1980's when it got involved in complex interest rate bets.

Mr Cable said he understood why such strategies were being considered. When councils are majorly constrained in what they can do concerning council tax and commercial rates, they attempt to prevent more serious cuts via unconventional methods. In some instances they are successful, but there is a major risk of local authorities going bankrupt.

Structural Defects Insurance

The investments are being defended by local authorities, who insist that a lot of the money is used to help regenerate property in local areas. This is not true in all cases, however. Mr Cable said that some local authorities are investing in property in other regions of the country, a strategy that, in his opinion, makes no sense at all.

Matthew Oakeshott, an Olim Property investment manager, said that councils were using taxpayer money to play a huge game of Monopoly.

These authorities are in major need of returns at a time when interest rates are low and demands placed on councils are going up. According to a recent estimation, by 2020 English councils will have a discrepancy of nearly £6bn between what they receive and what they need to spend. The majority of the shortage can be attributed to the increasing costs of social care.

Two years ago the Local Government Association expressed concern that a dozen councils might be on the verge of bankruptcy. Since then, councils have had to be resourceful when it comes to balancing their books. Many of them used PWLB loans to invest in commercial property schemes, a move that other councils are imitating.

Mr Cable said that this type of copycat behaviour, with other councils following to invest in commercial property schemes, was concerning. He recalled 2008, when many councils were left in jeopardy after depositing vast sums into high-interest Icelandic bank accounts that proceeded to go bust.

Local government spokespeople dismissed the idea that a bubble was forming, pointing out that all council investments were made on a case by case basis and strict borrowing criteria had to be met. The Prudential Code requires councils to prove that any investment strategies are affordable, sustainable, and prudent.

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