How COVID-19 could hit Somerset council services
Let me make it clear, we are not claiming to have predicted the COVID-19. Not by any stretch of anyone’s imagination. What we did predict/state throughout 2019 was the following:
- The UK property market is overheated
- Current commercial property prices look ambitious
- In uncertain times a mixed portfolio will prove safer than investing in one asset class – ie property.
The context was the way in which three District Councils in Somerset, Mendip, Sedgemoor and South Somerset, plunged hell for leather into property investment starting from 2018. The cause was not of their own making. Starved of central government funding during the decade of austerity, they needed an income stream to be able to pay for services.
Today they have between them over £100m in property investments at cost.
Their hope is that the rental income stream from those property assets will replace the grant funding they used to receive from central government.
Property is of course an easy option. Returns looked exciting. 7% was being offered by many of the deals coming to market. Perhaps their executives had seen prices recover from the 2008 crash easily enough. Perhaps they were not old enough to recall the property downturns of the years following the much larger 1987/88 property crash.
The fact is that whether it was COVID-19 or something else, putting all your investment eggs in one basket never looks like a good idea.
Today, with COVID-19 in full swing, we have two new pieces of information to digest:
- Research by Remit Consulting suggests that just under 50% of commercial and residential tenants paid their rent on time on the last quarter day (25th March). Commercial property rentals are traditionally paid on four quarter days in March, June, September and December. With shops closed, restaurants unable to continue and most staff laid off under furlough, this is not a big surprise. The unknown quantity is how many of those businesses will emerge on the other side of the current crisis, in a state to pay what is owed. And if many businesses fail, the impact will see a fall in demand for commercial property and following that a fall in prices.
- If any other evidence were needed, one of the biggest pension providers in Europe, Aviva, provided it. The company has blocked customers from accessing property funds in their portfolio. They cannot move assets from property to another form of investment. They cannot withdraw funds from property investment in cash. Aviva advises the block could last for up to 6 months.
The consequences for that £100m+ of investment made by Somerset’s district councils are as yet unknown.
But let us be clear, they were never frivolous in intent. They were made to provide income to secure services. A market crash could significantly impact that income stream and with it, the ability to provide services in the future.