Auctions can help cash-strapped councils

5th March 2024

Published by EG on 04/03/24

A growing number of local authorities are facing financial challenges and many are now looking at selling commercial property to help balance their budgets. This news has been met by concerns that they will essentially be carrying out ‘fire sales’. However, auctions – and an analytical understanding of local economies – can help them achieve best value.

For more than 40 years, a variety of local authorities have used auctions for managing their investment holdings and have recognised that auctions can effectively market assets to local, regional, national and international investors.

However, the reason for many authorities to use auctions is now more acute. The Local Government Association has estimated that one in five local authorities will face some form financial bankruptcy this year. Accordingly, the need for authorities to raise substantial amounts capital is often going to become urgent.

Birmingham city council is reportedly considering the sale of £750m of assets as part of its efforts to balance its budget and some commentators fear that this will lead to assets being sold at knock-down prices. I would suggest that authorities can avoid this by using both auctions to fully expose assets to the investor market and also by fully understanding the inherent strength of their local economies – which are often more robust than that of their local council’s finances.

Birmingham is the UK’s second-largest city with the second-largest single-tier council in Europe in terms of the number of people it serves and services it provides. In the EG last September when the news broke of Birmingham council’s financial problems, the urban investment expert, Jackie Sadek, observed in her typically direct style: “This is a major setback for Brum, no doubt. But it will be sorted. We press on. Birmingham’s demographic is young and vital. The city has excellent bones. Hold fast. Do not wobble. There is all to play for”.

This was a call for confidence but this positive view is also borne out by analysis of Birmingham’s economic momentum. The chart below from the UK economic vitality index, EvaluateLocate, tracks movements in the city’s index rating against that of the West Midlands and the median for all UK locations.

(Click image to enlarge)

As can be seen from the chart, when Birmingham issued a section 114 notice in response to financial problems, its economic vitality briefly dipped but, by the end of 2023, it was tracking upwards above the rate being seen across the West Midlands and the UK as a whole.

Given that property values are, in some measure, supported by confidence, the problems of a local authority could indeed have a negative effect on them. However, as this data shows, it is also wise to look at the wider economic momentum of a location and assess what that may mean for the value of its property.

And in terms of bringing assets to market, auctions are the most efficient, effective, transparent and timely route to market. The sale prices achieved at auction are incontrovertibly the best that can be achieved at that time for that asset.

In the first auctions of this year, we have already seen some examples of local authority assets coming up for sale. The results have been positive with competitive bidding driving sale prices comfortably above guide prices. There has certainly been no demonstrable evidence of assets going at ‘fire sale’ prices.

Whilst local authorities won’t relish the remedy of having to sell assets which have provided long-term income, the fact that the UK property market is now looking forward to a more positive outlook with expected interest rate cuts and a better economic narrative expected to help bolster the prices that will be achieved by these sales.