Exeter City Council’s borrowing has nearly tripled over the past three years as it has made large loans to its property development company Exeter City Living, financed the construction of the £42 million St Sidwell’s Point leisure centre and spent £44 million purchasing the Guildhall shopping centre leasehold.
It has also bought office blocks including Senate Court in Southernhay Gardens, for which it paid nearly £10 million , and increased its Housing Revenue Account debt by borrowing an additional £15 million to finance the construction of social housing.
The council’s total borrowing from the government Public Works Loan Board facility, which provides loans for capital projects, stood at £168 million at the end of March this year, according to its unaudited 2021-22 statement of accounts. Its net budget for interest payments in 2022-23 is more than £2.6 million.
However its capital financing requirement, the amount it has an underlying need to borrow to finance capital expenditure based on its plans, is set to soar. The council currently expects it to nearly double over the four years to March 2025 to just over £300 million.
The council already owned the freehold of the 300,000 square feet Guildhall shopping centre when it decided to create a £55 million budget to buy the leasehold in October last year. The remaining £11 million is allocated for its redevelopment, although it says it has no plans to redevelop the site for the forseeable future.
The decision, which was supposedly made as “part of the Liveable Exeter vision”, may have breached local government transparency regulations as it was taken in private without sufficient notice.
Local authority borrowing via the government Public Works Loan Board facility to enable the acquisition of assets bought primarily for yield has not been permitted since March 2020. This change in policy followed an increase in councils using this lending facility to borrow money at lower than market rates to buy investment property purely for rental income.
In the three years to 2019 local authorities spent £6.6 billion buying commercial property – fourteen times more than during the preceding three years – of which as much as 90% was financed by borrowing. A National Audit Office report highlighted how some councils would be significantly exposed in the event of a recession or property market crash.
The city council, however, was given permission to use Public Works Loan Board financing to purchase the Guildhall shopping centre leasehold provided it uses surplus rental income for regeneration activity, even if not at the shopping centre site. It therefore intends to cover the £900,000 cost of demolishing the old bus station this way, having unsuccessfully bid for Levelling Up funding for the project.
The council has also transferred the leasehold of the shopping centre’s residential units to Exeter City Living to prevent tenants gaining occupancy rights as a result of the overall sale which could have later prevented the council evicting them “for asset management purposes”.
The council presented a report on the shopping centre leasehold purchase to its executive committee in July. Like the decision to create the £55 million budget to buy the leasehold, the report was not published and the press and public were excluded from the meeting when it was discussed.
In the same way as it sought to delay its response to a freedom of information request for a report on its decision to pave the way for a 186-bed “co-living” block in Summerland Street, the council claimed that “the complexity and volume of the information” made it “impracticable” to respond to a freedom of information request for the Guildhall shopping centre report the within the time limits permitted by law.
Like the Summerland Street report, the council took two months to release the Guildhall shopping centre report, twice as long as allowed by law. It was also just three pages long, including redactions for which the council failed to supply the justifications required by law.
The report includes what the council describes as an “outline business plan for the asset going forward” which extends to just five paragraphs and makes vague propositions for which no supporting information or documentation is supplied.
These include the production of “an asset strategy to strengthen the [shopping] centre’s position as Exeter’s leading leisure, food and beverage and socialising destination” and the “possibility” of exploring “closer integration of management of the [shopping] centre and the Guildhall car park to enhance the continuity of the customer journey which should boost usage and coordination across the functions”.
The council also claims that “the asset presents a significant future opportunity to implement transformative change within the city centre, building upon the regeneration initiatives already underway and in the pipeline and contributing to the Liveable Exeter aspirational prospectus” and says “creating synergies” with the widely-criticised Harlequins co-living redevelopment (on which work has yet to begin) will be “fundamental to implementing successful step change”.
The report does not mention the high churn rate in the Queen Street flank of the shopping centre following its £12 million redevelopment in 2016. Only three of the original eight food and drink businesses have survived: three closed before the pandemic struck. The scheme’s promotional website can’t keep up: The Stable, which shut more than two years ago, still features, as does Absurd Bird, which closed more recently.
Nor does the report mention what the Financial Times described as Exeter’s “startlingly poor” in-person sales performance during the pandemic, or the Centre for Cities 2022 outlook report which found that Exeter had experienced among the highest reductions in bricks and mortar fashion retail sales in the country.
A recent sector-wide report by Knight Frank, the firm which marketed the Guildhall leasehold sale, found that the structural issues facing shopping centres were firmly in place before the pandemic, and that while shopping centre income from leisure spending has risen slightly, large falls in other areas have decisively offset it as part of an overall decline.
Meanwhile no-one should be in any doubt about the extent to which the UK’s economic crisis is likely to constrain the discretionary spending power of all but the most wealthy, even if the city council’s leadership were insufficiently informed this time last year to pause for thought before deciding to invest £55 million of public money in a retail and leisure destination.
As Harry Badham, who oversees development and asset repositioning for Hammerson, a major UK shopping centre operator, said in an interview earlier this year: “Anyone in any sector who denies there’s going to be change and thinks they can sit back and collect rent for fifteen years is going to be mincemeat”.
