12 May 2020

The Rise of Public Works Loan Board Funding and its Future in a Post-COVID Landscape

The increase in the use of loans issued by the Public Works Loan Board (PWLB) by local authorities in recent years has been well documented, with Councils borrowing billions of pounds at low rates of interest to fund investment in commercial real estate across the UK.

This investment has followed reductions in funding for local governments, who instead plan to use rental income from these investments to replace finances previously received from the Treasury, which have reduced by around 50% since 2010.

The rate of increase of this type of investment has been significant, with the National Audit Office reporting that Council spending on shops and offices in the three years from 2016 to 2019 (£6.6bn) had increased 14-fold on the previous three years.

A number of local authorities have accumulated over £1bn of debt from the PWLB in this time, including Birmingham City Council, Leeds City Council and, most contentiously, Spelthorne Borough Council (home to less than 100,000 people at the time of the last census) who lead the way nationally in terms of PWLB borrowing.

This trend led to concerns in the corridors of Westminster in relation to PWLB borrowing, with the House of Commons Public Accounts Committee highlighting concerns in May 2019 that some Councils had “audit committees that do not provide sufficient assurance, ineffective internal audit, weak arrangements for the management of risk”. The National Audit Office have also heard reports from a number of Council chief executives and finance directors that Council spending on external audit has been reduced, when such audits are likely to be needed more than ever to ensure value for money is still being obtained from increasingly risky commercial investments.

Towards the end of last year, the Treasury looked to take back control and announced in October 2019 that the cost of PWLB loans would increase overnight from 1.81% to 2.82%. This – somewhat predictably – was followed by complaints from Councils that the increase would scupper the delivery of projects at various stages of the development pipeline.

The Treasury has recently responded by cutting the interest rate for PWLB loans back to pre-October 2019 levels, but only in relation to loans for social housing projects. Alongside this, the Treasury has opened a consultation on the future lending terms of the PWLB, which is currently slated to close on 4 June 2020.

The COVID-19 crisis has affected every aspect of the UK economy but perhaps none more so than the retail and leisure sectors, which make up a significant proportion of the real estate portfolios of a number of local authorities. Reports continue to emerge daily of the impact the crisis is having on occupiers. Savills recently reported that close to two-thirds of the retail, food & drink and leisure occupiers polled did not pay their March quarter’s rent.

The reduction in rent receipts, threat of closures following occupier insolvencies and the reduced use of Council-run assets, such as car parks and leisure centres, will damage the balance sheets of almost all local authorities, particularly those who have accumulated large real estate portfolios in recent years using PWLB loans.

It remains to be seen whether the Government will intervene in the manner they have done in some sectors. However, Housing and Communities Secretary Robert Jenrick warned on 4 May 2020 that, while grant funding would be made available to compensate some local government income losses, he is not minded to provide a bail out for Councils who have increased their exposure significantly in recent years through increasingly risky real estate investments funded cheaply through PWLB loans. To do so may “prove unfair to those Councils who have managed their finances responsibly”, Jenrick added.

Some local authorities had justified their use of PWLB loans prior to the COVID-19 crisis by pointing out that the private sector had long since abandoned investments in the town centre retail sector and concluded, therefore, that they were instead providing much needed investment into struggling retail markets where no-one else is able or willing to.

Whether such investment is delivered once the crisis abates remains to be seen. However, with more people working from home than ever before, local authorities might instead find an unexpected opportunity to reimagine their high streets and town centres, to make the most of their local population who now find themselves working within a short - socially distanced - stroll from their local high street in a way that has not been commonplace for generations.

Andrew McEwan is a Senior Associate in our Commercial Real Estate team.

Disclaimer

The current global crisis is evolving rapidly, and the rules and guidance for individuals, companies and other entities to manage its implications are similarly fast moving. Notes such as this may be out of date almost as soon as they are published. If you have any questions prompted by this article or on any other matter relevant to you, please get in touch with your usual contact at Forsters.

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