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Local Authorities Are Going “all in” on Commercial Real Estate

James Norton, partner in the real estate department at Fladgate, comments

A number of articles have been written recently about local authorities  “gambling” by investing in commercial real estate, particularly at a time when there is an ever increasing demand for community services and social care and a squeeze on the funding to sustain them.

Reports suggest that local authorities have invested in excess of £4bn in commercial property over the last five years and investment in the first half of 2018 is believed to have exceeded £1bn alone. To put this into perspective, figures quoted by Savills suggest that local authorities now represent 3.8% of all commercial property investment, an increase from 0.16% in 2014.

Opponents point to over inflated purchase prices (particularly against a backdrop of wider economic uncertainty) and, in
some cases, an incoherent acquisition strategy. Yet, following the government’s announcement back in 2015 that local authorities must become self-sufficient by 2020, there is a clear and present need for incoming producing investments. Despite the uncertain and cyclical nature of real estate investments, the availability of “cheap” funding through the Public Works Loan Board and alternative structures like “income strip” deals has prompted a huge increase in investment in and exposure to commercial real estate by local authorities.

In terms of investment between asset classes, the main bulk of the investment has been in office (50%), retail (32%) and industrial (13%) (approximate figures). In terms of the largest investors, Spelthorne, Runnymede, Warrington, Canterbury and City of London are considered the largest investors. Spelthorne’s acquisition and lease back of BP’s International Centre for Business & Technology in Sunbury for £360m and its more recent acquisition of an office portfolio from the Brockton Capital/Landid JV for a reported £285m, are stand out deals.

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