Why are local authorities taking a commercial approach to asset investment?

After recently attending the Public Sector Asset and Estate Management Conference, it is clear that the previous two years have seen a significant increase in commercial activity and investment from local authorities.

With continued uncertainty and evolving requirements for the public sector, we are encouraged by the £1.2bn spend in 2016 on commercial activity and investment. The 2017 figure is expected to rise, however it is evidenced that this type of investment will continue to come under increased scrutiny from central government and the investment markets.

Local authorities are well placed to make commercial investments, with access to low cost debt via the Public Works Loan Board and willing to take a long-term patient approach to property investment.

They are driven by the need to:

• Generate the revenue income required to support front line services due to ongoing budget cuts and the inevitable switch-off of government grant. The ability to drive revenue streams from rental income and business rates is a key motivator for local authorities.
• Drive economic growth within their regions. Investors and developers are often unwilling to take the risk to create markets in a number of towns and cities, with core cities continuing to monopolise the available low risk investment capital. Authorities are therefore stepping in to self-develop and hold commercial assets to create or kick start the local market.
• To invest in social infrastructure due to the lack of central government capital. Examples would include commercial investment in primary care, higher education and intermediate care. Investing on a commercial basis but recognising the savings generated to the wider public sector economy and the social value created, offers an opportunity for public sector stakeholders to jointly benefit from the investment.

We would encourage local authorities to adopt a collaborative and innovative style to commercial investment along with a recommendation to emulate the approach taken by traditional funds and diversify investment into a range of asset classes, locations and risk profiles. Bringing the investments together into a diversified “fund” will mitigate the risk of loss and provide opportunities around:

• Investing inside and outside the borough, although out of borough investment is often seen as controversial.
  
• Providing funding for potentially lower yielding investments to benefit the wider public sector (primary care etc.).
  
• Investing into a limited amount of higher risk opportunities to create or stimulate a new market.
  

In addition to diversifying the investment, identifying the skills and expertise to source, evaluate and manage investments is paramount for local authorities. With their existing strong history of treasury management, it is essential we collaborate and utilise the resources available.

These resources are provided through working in partnership with the local authority and assisting them to develop one-off projects, collaboratively evolve the skills required to build a long-term revenue generating investment portfolio, ensuring community benefits are at the heart of every investment and project.

Perfect Circle is a joint venture formed by Pick Everard, Gleeds and AECOM, set up to realise value and opportunity for public authorities, SCAPE and communities across the UK. Perfect Circle leads the Built Environment Consultancy Services framework.