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Local authorities have entered the cost-of-living crisis in a weak position due to having just experienced the shock of Covid-19 and in the context of having previously gone through a decade of austerity, experts at Avison Young have said.
James Dair, principal head of real estate finance at Avison Young, told PF rising interest rates have increased future borrowing costs and added to existing local authority finance pressures.
“The situation has slightly worsened compared to the same period last year,” he said.
“But the problems we are seeing at the moment have been in place for a long time.
“As a result, local authorities really should not be shying away from having those difficult conversations, and making difficult decisions to deliver stability going forward.”
Kimberley Grieveson, principal of land and development at Avison Young, said councils have sought out risk audits of subsidiary companies this year, to gain a greater understanding of potential pitfalls.
“A number of wider questions have been raised over wholly owned housing vehicles and regeneration companies,” she said.
“Local authorities want a bit of an audit to get an understanding of why we set these vehicles up, what they are doing and what they are capable of. And in some instances, whether they are fit for purpose or whether they should be looking at options to close some of these down.
“That has been quite an interesting area over the last a year or so where there’s certainly been growing interest from local authorities.”
Dair said authorities have also sought advice about managing their property estates, to help mitigate risks and ensure they positively contribute to council finances.
“We are certainly seeing more local authorities asking for professional support to help address some of the financial challenges they find themselves in,” Dair said.
“Many of those local authorities are looking to use property assets to generate capital receipts, and in most cases to help reduce the level of current borrowing.”
Dair said that next year authorities will need to have a clear strategy for how their investments feed into their objectives and reduce pressures on their revenue budgets.
“A lot of local authorities are finding that existing borrowing is largely unsustainable from a revenue budget perspective,” he said.
“Interest rate rises are directly impacting borrowing costs, and we are seeing a greater proportion of revenue budgets used just to service that borrowing cost, leaving less money to fund services.
“We are seeing stark increases in those percentages, which is worrying, and with interest rates going up, it’s only going to get worse.
“We have recommended that local authorities adopt a very, very clear strategy with strong governance arrangements, and ensure that revenue sustainability is at the forefront of decision-making.
“That is absolutely key going forward, because without that, the situation will continue to erode.”
Regardless of financial positions, authorities should be using the financial environment to review their property portfolios to ensure they understand the full cost of holding them, Dair added.
“Everyone should be carefully examining their asset base, so they’ve got an absolute understanding of what they hold, why they hold it and what the real cost of ownership is,” he said.
“That should absolutely be the case, regardless of their financial position.
“Because what you can ill afford to have now as a local authority is assets that you don’t fully understand and control, but more importantly, don’t understand the real cost of holding.”
He said that often a lack of commercial knowledge in local authorities makes it important that they use independent advice to improve their understanding of potential risks.
“It’s safe to say that resources within local authorities have diminished over a period of time,” Dair said.
“Authorities have had to make difficult decisions and trade-offs about how they prioritise the resources they do have.
“However, there is no excuse going forward about not understanding that asset base, because it is going to be so important going forward.”
The advisory firm said that some authorities currently lack adequate data to understand the full cost and owning estates, and must make better use of digital systems.
“A lot of authorities that we work with have a finance team that uses a property management system for collecting rental data,” Grieveson said.
“These systems have a huge capacity to do a lot of additional things for the council, but officers in the property team or in the asset team don’t exactly understand it.
“In essence councils are paying for something which they are not fully utilising, and you almost have three or four versions of the truth running in parallel with different people feeding off different internal systems.
“This is really where the problems sit.”
