Given all the UK commercial real estate doom and gloom we thought it an opportune time to take a look at the Public Work Loan Board’s (PWLB) local authority loan book data that’s available to the public.
As a reminder, local governments were borrowing money from the PWLB and pouring it into commercial real estate developments and acquisitions with gusto, seemingly to replace central government funding with a positive carry trade. This continued until the Treasury banned the practice back in 2020.
The OBR wrote about the risks back in 2019. But rather than focussing upon its cause célèbre — the heaving metropolis mid-sized Surrey commuter town of Woking (more on that shortly) — it showcased the tiny Spelthorne Borough Council. “Commercial property is often among the hardest hit asset classes during economic downturns,” wrote the OBR in its cheery upbeat style, before concluding by noting “[p]rices fell 24 per cent in two years around the 2008 financial crisis.”
Yesterday Woking Council suspended all non-essential services — widely reported across the media as being the local government equivalent to declaring bankruptcy. A Guardian story from last month checking in on Woking’s outsized property development activities gives some great context. In brief, it seems that local governments YOLO’ing borrowed money into commercial real estate developments and acquisitions did not prove – at least from a mark-to-market perspective – to be the best move.
Spelthorne Borough Council have just dropped their draft accounts, and they don’t make for happy reading. The Council marked its commercial real estate portfolio down by 18 per cent on the year – a cool £161mn. This takes it down 24 per cent – or £237mn – from the 2019/20 peak, bang in line with the OBR’s 2019 mic-drop warning. Adopting fund manager reporting tropes, the Council pointed to the Cost-of-Living Crisis, COVID-19 and the war in Ukraine as performance headwinds and offered comforting words about being a long-term investor.
Anyway, here’s an interactive chart showing all 16,000 local government borrowings from the PWLB, totalling almost £96bn with repayments stretching out to March 2073.
A few things to note.
First, the chart above is an absolute mess unless you’re looking at a single local government borrower — so use the filter.
Second, there are some really expensive loans still out there (take a look at Durham County Council’s borrowings from the 1960s and 1970s). 25th September 2023 will be a happy day in Merthyr Tydfil as its 11.38 per cent borrowing is finally repaid or refinanced.
Third, a number of local authorities took advantage of ultra-low bond yields to lock in ultra-low-cost super-long borrowings (take a look at Cornwall, who locked interest rates at 1.26 per cent in a £175mn drive-by in December 2021).
Spelthorne Borough Council look like they’ve laddered their debt payments pretty evenly, with an average loan of 2.33 per cent on their c£1.1bn of borrowings, and an average maturity of 2049. So they’ve got a few years for things to turn around, and it doesn’t look like they’re facing a redemption cliff.
And Woking? While its market timing and/or stock selection looks to have been abysmal, its debt funding timing seems… great? The £1.8bn that the PWLB has advanced carries an average maturity of 2064 and a fixed rate of less than 2.7 per cent. Indeed, the PWLB marked the value of Woking’s debts down to a mere £1.5bn based on March 31 yields — and they will be much lower still today given the subsequent rise in gilt yields. Maybe raising large amounts of debt to buy real assets wasn’t such a terrible idea. It’s just a shame about the assets.
Read the full article here