Bradford City Hall, c Neil Turner on Flickr, via CC BY SA . bit.ly SLASH MVQefT

Bradford City Council is one of several local authorities facing potential bankruptcy. Credit: Neil Turner on Flickr via CC BY-SA 2.0; bit.ly/3MVQefT

The Subplot

The Subplot | Councils in crisis, hotels, student housing

Welcome to The Subplot, your regular slice of commentary on the business and property market from across the North of England and North Wales.

THIS WEEK

  • Councils of despair: Town halls face a difficult 2024, one the property industry cannot ignore
  • Elevator pitch: your weekly rundown of what is going up, and what is heading the other way

Listen to the podcast edition


COUNCILS OF DESPAIR

Town halls mull land and property sales

Bradford and Cheshire East are the latest Northern councils to face potential bankruptcy.

They won’t be the last in 2024, a year that will severely test one of the property industry’s most significant regulators and partners.

The cancellation of HS2 appears to have claimed a significant scalp: Cheshire East Council. The local authority, whose area includes Crewe, is now facing the local authority equivalent of bankruptcy – a section 114 notice – after it had to write off £8m of the £11m it spent prepping for the arrival of HS2.

Bradford City Council’s story is more typical. A £73m funding gap in 2022/2023 is ballooning to £103.6m in 2023/2024. Inflation – hardly the council’s fault – is responsible for £58m of that growth. Then there’s Middlesbrough, Kirklees, and dozens of others in the same boat.

Why is this happening?

The problem is fairly simple. Central government has cut the block grant it provides local councils whilst forbidding councils to raise council tax to replace it. The Local Government Association estimates the gap between spending and income to be around £4bn between now and the 2025 budget process. In response, councils have made cuts and relied on their reserves. But after years of digging into their savings, some councils have, in context, microscopic reserves. For instance, after taking its HS2 hit, Cheshire East would be down to £6m.

Choices

With no reserves left to plunder, the only option is massive cuts, asset sales, or bankruptcy. The bankruptcy option is a section 114 notice issued by the chief financial officer (not a politician) when expenditure exceeds income. Councillors then have 21 days to sort it out. In the meantime, no new spending can be approved. Spending is limited to statutory services or existing contracted commitments.

Does this mean land and property sales?

Maybe. Some are already talking in these terms. Bradford’s ruling executive is “considering ways to balance the books. Alongside the development of a significant savings plan, is the development of a comprehensive transformation programme and a plan for the disposal of council-owned land and assets,” according to council paperwork published just before Christmas. Bradford publishes its plans today.

No bailouts

Bradford won’t be alone, and it will involve the government via a process called capitalisation directions. These directions from Whitehall are often branded “bailouts” – but that couldn’t be further from the truth, because they amount to permission to spend the council’s own (capital) resources.

So, for instance, Wirral Council was given a capitalisation direction for 2021/2022 for up to £6.4m. This allowed them to treat day-to-day expenditure on services as if it were capital spending. In return, the government required Wirral to work on “a plan for the generation of additional capital receipts (either through asset disposals or changes to its capital programme)” to at least the same value as the spending.

No fire sales, either

If the current crisis leads to land and property sales, it’s going to be slow. Major authorities with the potentially most desirable assets are, on the whole, the ones least likely to sell them because their portfolios are income-generating already. Thus Manchester, facing potential budget shortfalls rising from £46m next year to £105m by 2026/2027, is looking at a “new Medium Term Financial Plan, Capital Strategy and Asset Management Plan,” according to reports to the cabinet in December, which might point towards asset disposals one day.

Manchester is already squeezing its property income. For instance, the city council increased rental income from Manchester Airport (£0.63m) and a new ground rental portfolio secured against long leasehold disposal of land as part of the Victoria North development (£0.3m).

Expectations are low

The prospect of asset sales hovers in the background for all local authorities. Subplot has spoken to senior officials and the consultants who advise them and, yes, contingency planning is taking place. No doubt some councils will turn to the private sector to help lever solutions to their regeneration problems, as they always have. But the opportunities these present to the property industry are dwarfed by the problems caused by hobbled local councils understandably preoccupied with the survival of basic services and little time, flexibility, or wiggle room. Whether a change of government can stump up the billions needed to change this quickly, or at all, remains to be seen.


ELEVATOR PITCH

Going up or going down? This week’s movers

Two things that you should not ignore in the coming year: student housing attracts yet more big money, and the gravity-defying hotel sector continues to rise. Doors closing, going up.

Student beds

Aviva Investors agreed to buy a £240m PBSA portfolio amounting to 1,838 beds including two 400-plus hubs in Newcastle and Liverpool, and a smaller outfit in Durham, it has been reported. The Liverpool purchase comes with a Premier Inn and a Lidl.

The deal with CBRE Investment Management comes as investors reckon the continued shortage of UK student beds makes this a safe, inflation-hedging bet.

More development is coming, particularly in Leeds. For example, the car park at Joseph’s Well, the Park Lane office building, is being prepped for a 14-storey PBSA scheme by developer Pullans. If planners agree, this could see 242 new student rooms. In the super-hot PBSA market, the loss of 81 parking spaces won’t be noticed.

A few days earlier, Town Centre Securities decided to add 1,100 student beds to a residential wing of the Merrion Centre carved out of the former Wade House office block. As Place Yorkshire reported, research commissioned by Cushman & Wakefield in support of the application said that there was potential demand for around 26,000 additional student beds in the city.

Leeds hotels

A fascinating data drop from Knight Frank/HotStats on the regional hotel market in the form of the UK Hotel Trading Performance Review 2023.

The background is that hotel room occupancy is up in the regions (and, for the first time in a while, in London), average daily room rates are rising, and increased prices are sticking. Regional average daily room rates have nudged above £100 (to £103) for the first time. Yes, occupancy is still a shade under 2019 levels but everything is pointing the right way. However, scroll down to page 30 and the real fun begins with two tables, one a lagging indicator and one forward-looking.

The lagging indicator shows the volume of newly built rooms as a proportion of the active hotel market in each city. It tells us what investors and hoteliers were thinking two or three years ago.

What it shows is a slowdown in development in Manchester where the active supply pipeline promises to add 6.9% to the city’s total, and. an absolutely monster acceleration in Leeds, where it’s 14.2%. There’s growth too in Liverpool (7.3%) and York (4.8%).

But revenue per available room is more of a forward-looking indicator: it suggests what developers and investors might do tomorrow. Here the data compares 2019 figures to 2023. What it shows is that Manchester’s RevPAR has barely moved (up from £79 to £82), York likewise (£80 to £83) and Liverpool a little but not a lot (£72 to £79), yet in Leeds it stormed up (£59 to £74). More hotel development in Leeds – and an even larger active pipeline – is likely to be the result.


Get in touch with David Thame: [email protected]

Your Comments

Read our comments policy

Related Articles

Subscribe for free

Stay updated on the latest news and views in North East property

Subscribe

Keep updated on the latest news, deals, views and opportunities in North East property, in your inbox.

By subscribing, you are agreeing to Place Terms & Conditions and Privacy Policy.

"*" indicates required fields

Your Job Field*
Other regional Publications - select below