The Chartered Institute of Public Finance and Accountancy (CIPFA) has issued guidance outlining reporting requirements for investments in property by local authorities to increase accountability
In recent years, local authorities have increasingly looked to commercial property investments, including hotels, farms and retail properties, to supplement the revenue they are able to generate.
Local authority borrowing is covered under CIPFA’s Prudential Code, but the increasing importance of property investment in councils’ financial plans, has resulted in demand for more specific guidance.
The CIPFA guidance on prudential property investment makes clear that authorities must not borrow more than their specific investment needs purely in the interest of profit. It reflects circumstances where there is no specific or projected need to borrow, but an opportunity has been identified to make profit greater than the authority’s cost of borrowing.
It also clarifies the importance of transparency and democratic accountability, stating that proposals should be compliant with the investment strategy approved in advance by members of the local authority and has to be made publicly available. Local authorities also need to take into account liquidity to ensure that the funds invested in property can be accessed when needed.
The issue of proportionality is addressed, with a requirement to ensure that there should be full disclosure of plans to achieve a balanced budget depending on profit-generating investment activity. At the same time, local authorities must not take on debt to acquire investment properties.
There is also a requirement for more detailed affordability analysis, particularly disclosure of information about how the investments are financed.
The CIPFA guidance warns: ‘The temptation might be to treat investment property like other types of investment, where the cost of acquiring an instrument would be covered by the amount that the authority expects to receive back on redemption or sale.
‘This treatment is encouraged by the fact that the proper accounting practices for investment property do not involve the charging of depreciation. However, this does not mean that investment properties are effectively costless in relation to acquisition and refurbishment.
Don Peebles, head of policy and technical, CIPFA, said: ‘In a landscape still reeling from a decade of austerity, we would not expect commercial investments in property to be abandoned in full. However, we must ensure that responsible decisions are made with transparency and financial sustainability in mind.
‘In the end, the most important consideration is how taxpayers will be affected by decisions made at the top, and they should not be left in the dark about the process.’
Copies of the guidance, Prudential Property Investment, are available from CIPFA