Strategic Asset Management: a must for local authorities

Local authorities are huge owners of real estate: they own an astonishing variety and complexity of land and buildings. Most real estate owners conduct periodic strategic asset reviews, whether property ownership is their primary role or ancillary to their main purpose. We think there is an opportunity for local authorities to do the same.

The aim would be for local authorities to maximise the efficiency of their assets. This would include a review of the asset management strategy, ensuring that revenue is maximised and costs are minimised. It would ensure that development opportunities are optimised, considering the return on investment in specific assets alongside the potential impact on wider operational priorities.

Such a review may also identify assets that could be sold with the minimum of impact on community value. The capital generated could be used for repayment of debts, investment in projects that respond to operational priorities or generate new community value, or reinvestment into assets that are more profitable.

We have identified the total land holdings of all local authorities across England, covering both their operational and investment assets, detailed below. 

Why is it important to better understand this land?

The financial woes of local authorities are well known. Some of the financial problems have been caused at least in part by one-off events, such as poor investment decisions or equal pay disputes. But this issue is steadily becoming more widespread.

In December 2023, the Local Government Association (LGA) reported that one in five council leaders and chief executives surveyed said it was very or fairly likely that their chief finance officer would need to issue a section 114 notice in 2023/24 or 2024/25 due to a lack of funding for key services. The Institute for Fiscal Studies has argued that this is only the beginning and that “the real pain looks set to be from 2025/26 onwards.”

What is the solution to the lack of funding? Alongside the formulation of the 2024-25 financial settlement for local authorities, DLUHC published a consultation on revising the guidance that currently restricts the use of capital receipts to fund revenue spending. Options included:

  • Allowing local authorities to use capital receipts to cover ‘general cost pressures’, alongside an efficiency plan to restore financial sustainability;
  • Permitting borrowing to cover the revenue costs of ‘invest to save’ projects;
  • Flexibility over the use of revenue generated through sale of investment assets, specifically to encourage divestment of assets held only for revenue;
  • A reduced PWLB interest rate for ‘invest to save’ projects.

“Selling off the silver” has been the characterisation of several commentators on the potential effect of the proposed reforms. Actual examples of silver at risk of sale have been uncovered by the BBC, alongside more serious concerns from LSE that the sale of assets may harm the long term effectiveness of local authorities to shape the health of local economies and generate community wealth or social value.

What do local authorities own?

As shown below, local authorities own a large amount of land of various types. This includes operational land, much of which is residential, but also includes parks and recreational space, and buildings from which councils provide their public services. They also own investment assets and, perhaps surprisingly, many local authorities own land outside their administrative areas. Purchasing assets outside of their borders is now more narrowly regulated, with many of these assets a consequence of purchases in the early 2010s.”

Net income from investment property totalled £435m in 2022/23, according to the latest local authority finance data compiled by DLUHC. This is equivalent to just 0.4% of total service expenditure across England, but the data reveals a range of experience across local authorities. Across all local authority investment properties, the average net operating income margin is 50%. But many local authorities achieve much lower margins, and 10 made an operating loss on investment properties in 2022/23. So there is a clear opportunity to identify low profit and particularly loss-making investment properties, and formulate a strategy for improving their performance as community assets or better performing investments. 

Nearly all local authorities own at least some land outside their administrative borders. While some of this land may be needed for operational purposes, other portions will be will be held entirely as investment assets. Over a quarter of local authorities have over 100 acres of land beyond their borders – about 40,000 acres of land in total. If local authorities need to consider selling assets to release capital, these assets may be the first to come under scrutiny.

What could be achieved?

Strategic asset reviews would allow local authorities to differentiate between:

  • Assets that are central to the local economy and community value, or have clear potential to be so. These need to be retained and, if possible, made less costly to own, and operated as efficiently as possible.
  • Operational assets with unrealised potential for ‘invest and save’ projects, for example to create additional social value through provision of affordable/key-worker housing or affordable workspaces, the revenue from which could feed back into service provision. These need a business plan to understand the costs and benefits of investment.
  • Investment assets – land outside the local authority boundary or within it, which is only held to generate revenue or for value appreciation. It is important to understand the leasing profile of these assets, opportunities to increase revenue and any impending costs associated with owning them.
  • Rationalisation opportunities – fringe assets with little potential to generate community value and which generate a low financial return for the council. These assets should be at the top of the list for disposal to release capital for investment and debt repayment.

The full potential can only be realised through comprehensive reviews of LA asset ownership, set in context of LA objectives and property market dynamics.