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UK councils buy shopping centres as retailers struggle

When Canterbury was bombed during the second world war, its local council bought up damaged properties with the aim of regenerating them.

Seventy-five years later, Canterbury city council has moved into buying property as well as land to regenerate its city centre and bring in extra cash at a time when the local budget is squeezed.

In February, the council struck one of the largest shopping centre deals involving a council on record, taking full control of Whitefriars in the city. The local authority bought out global fund manager TH Real Estate’s 50 per cent stake for £75m. The council had bought its initial 50 per cent stake for about £80m in 2016.

The council intends to continue to run the shopping centre for at least the next decade, but Colin Carmichael, the council’s chief executive, said owning the site gave the local authority the option of redevelopment in the long term.

“The shopping centre takes up such a large part of the centre of the city,” said Mr Carmichael. “Owning it gives us the opportunity to influence the regeneration of the city in the future.”

Canterbury, the historic city in south-east England, is not alone. In recent months, many local authorities across the UK have bought unloved shopping centres from investors keen to offload them as concern mounts over the health of UK retailers.

According to figures from BNP Paribas Real Estate, UK local authorities accounted for nearly 70 per cent of all shopping centre investment in the first quarter of this year.

Councils spent £255.15m in the three-month period, putting them on track to pour a record amount of money into the sector this year.

Beyond Canterbury, other large recent deals include those by Shropshire county council, which bought three shopping centres in Shrewsbury for £50.75m from Aberdeen Standard Investments.

The council said it bought the centres to “support economic growth and regeneration” in Shrewsbury town centre, as well as to gain access to a “sustainable year-on-year income stream, including £2.7m in the first year”.

The value of shopping centres has come under intense pressure as retailers battle higher import costs, low levels of consumer spending and the relentless rise of online shopping.

Councils have nevertheless pushed aggressively into buying commercial property over the past two years, using low-cost funding available to them from the Public Works Loan Board, an arm of the Treasury, as they seek to generate extra income to fund services.

The low-cost funding allows councils to bid much higher sums for property than private investors.

James Findlater, head of UK shopping centre investment at Colliers, the global estate agency, said the trend of councils buying these properties was concerning, as councils were often not buying prime assets and instead taking over centres “from sleepy institutions or desperate private equity investors that cannot wait to move them on”.

“Councils have come in and will pay yesterday’s prices for assets they’re not well placed to manage,” he said, adding that selling to local authorities was considered the “last type of exit” by larger institutional investors.

“Each cycle has dumb money that, for whatever reason, has different motivations,” he said. “This cycle the dumb money is council money.”

But Nick Robinson, a retail analyst at BNP Paribas Real Estate, disagreed, saying councils were generally buying with a view to improving their local area.

“The rationale is either town-centre regeneration or income replacement for the loss of government subsidies,” he said.

Another retail estate agent, who did not want to be named because he acts for both councils and institutional investors, said councils were happy to take a lower return on their money in exchange for doing what they thought was a social good.

“[Investors] are offloading underperforming assets to any buyers but, at the front of the queue, are those who have most to gain,” he said.

“[Councils] have got a lower cost of capital; there is a once-in-a-generation opportunity for them to buy into the retail centre when they’re not priced out by the private sector.”

Mr Carmichael of Canterbury city council said the authority’s low borrowing costs meant it could make a decent income stream from Whitefriars — but conceded that the authority would need help managing its investment.

“We’re not looking for immediate profit, we’re looking to influence the centre of the city,” he said. “We’re not looking to make a loss.”

He added that in the face of funding cuts to local authorities, councils were forced to be “creative”.

“It’s not the way things were done five years ago,” Mr Carmichael said.

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