As of 9.30am today, the cost of financing for local authorities taking loans from the Treasury’s Public Works Loan Board (PWLB) suddenly rose. All new loans from the PWLB will “increase…by 1% on top of usual loan terms”.

The letter from Treasury informing Chief Financial Officers of the change labours the point that the Government supports the aims of local authorities by borrowing to "support local capital strategies, organisational objectives, including regeneration, and supporting growth and service delivery". However, it also recognises that “some local authorities have substantially increased their use of PWLB in recent months”, taking advantage of the historically low gilt yields upon which the on-lending structure of the PWLB is based. This appears to be Government seeking to apply the brake to local authority investment in property through financial means whilst recognising the freedoms afforded to councils via the Local Government and Localism Acts.

This will have the effect of instantly forcing local authorities to go back and review their treasury strategies that are underpinned by cost of capital. Those projects already underway but for which funding has not yet been drawn down are also at risk. It will be interesting to see the outcome of this change on council activities and it should be noted that PWLB is not the sole source of funding, but it is a significant one.  

Councils currently represent approximately 3% of total UK property investment by volume, but that investment isn’t just about financial return, it is also about regeneration, place shaping, job creation and service delivery. If this is indeed Government’s attempt to curtail those councils with prolific investment activity, it fails to distinguish between those projects that are simply for financial return and those with a wider socio-economic purpose. Both will fall foul of this increase in base cost of financing.