15 May 2024

To invest or divest? Local authorities face difficult choices

To invest or divest? Local authorities face difficult choices image
Image: krungchingpixs / Shutterstock.com.

Stephen Edgar, director of Property Consultancy at Lexica, discusses what councils have to consider when it comes to managing their property portfolio.

As the nation prepares for a general election, local authorities find themselves grappling with mounting uncertainty and pressure to make critical decisions regarding their property portfolios.

The stakes are high, as a recent article in The Guardian noted potential government plans to compel councils to divest portions of their estimated £23bn real estate holdings to address budget shortfalls of £3-4bn over the next two years. So, what should cash-strapped local authorities do?

It’s important to remember that local authorities must strike a balance between financial considerations and the paramount responsibility of delivering quality services to local communities. It’s fair to say that it is a complex challenge for local government, and consideration needs to be given to what options are truly available to them.

For several years local authorities have been dealing with increasing energy costs, rising inflation, increased demand for key social care responsibilities for both children and adults, and a public estate which may or may not meet net zero carbon targets. The scale and complexity of these challenges has been the final straw to break the back of some local authorities who have had to issue section 114 notices.

According to research earlier this year from the Local Government Information Unit, half of councils (51%) have warned they are likely to issue a section 114 notice in the next five years. The sheer cost, for example, of meeting the rising need for social care has meant divestment from key services and scaled back future estate optimisation plans. The forthcoming challenges to modernise and upgrade key public sector owned buildings to reach net zero is simply too high, so local authority leadership teams are finding themselves balancing investment priorities with an increasing need to divest in estate and selective services in a scarce capital environment.

Furthermore, the public sector workforce has not returned to the office at the pace and scale originally forecasted. In contrast to recent moves within private industry to encourage workers to return to the office, local authorities are often faced with underutilisation across their administrative and office space, despite the requirement for civil servants to return to the office three days a week. On the one hand, this is a challenge for councils, and on the other it provides an opportunity to either divest part of their property portfolio to address budget shortfalls and ideally maintain critical service provision to local communities, or work in partnership with public sector partners to maximise utilisation and collaboration by centralising staff and services.

Rethinking how a property asset might be repurposed for investors is crucial. Remote and activity-based working, enhancements in technology and increasingly flexible workspace market solutions combined with high interest rates underpins the perceived lack of security in office space for property investors. The impact of this change is difficult to quantify, but a survey from CBRE in February showed that, for the first time this year, logistics and residential properties surpassed offices as the preferred asset class for international buyers, according to the survey. 34% expressed a preference for logistics and 28% for residential, compared with only 17% who favoured offices.

Importantly, when reviewing a property portfolio, local authorities may need to look beyond the obvious for a solution. Naturally, views will vary in different markets and asset classes, but we are seeing a shift in focus from capital appreciation to a focus on creating long term value in assets within some local authorities. This trend is emerging through the work we have recently supported local authorities on, where there’s a growing recognition of the importance of maximising the potential and adaptability of existing property portfolios.

We are seeing local authorities increasingly prioritise strategic investments in regeneration, affordable housing, and sustainable development to drive long term value creation. Enhanced collaborations with the wider public sector are enabling shared resources, estates, and expertise to unlock developments, optimise asset utilisation and support positive outcomes for communities.

By reallocating resources towards higher impact investments, such as revitalising underutilised properties or integrating sustainable design principles, councils can enhance their financial returns whilst also fulfilling broader social and environmental objectives. This shift signifies a more holistic approach to property asset management, aligning with the evolving needs and priorities of local communities.

What is clear is that it’s impossible to create a ‘one size fits all’ solution for local authorities considering whether to invest or divest property assets. For some local authorities there are ‘areas of opportunity’. This includes repurposing underutilised spaces within town halls to enhance public engagement and generate additional revenue streams, modernising and enabling flexible usage of leisure and community facilities to meet changing community needs, attracting diverse demographics, and increasing usage rates whilst sharing corporate office space with public sector partners. This will not only optimise operational efficiency, enhancing a joined-up approach to service delivery, but also reduce costs, reallocating resources for frontline services. For others, options may be more limited and therefore careful consideration should be given to how property assets can be best managed, optimised and potentially repurposed.

As councils continue to grapple with tough choices, leadership teams need to come to grips with the intricate interplay between fiscal constraints, long-term planning, and the vital role local authorities have in shaping sustainable communities.

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