How was Woking able to ride the commercial development rollercoaster without a seatbelt?

To win in the rollercoaster business of commercial property development is hard. Look at the share prices of the two FTSE 100 titans. Since the financial crisis of 2008-09, which caused commercial property prices to crater, Landsec’s shares have been as low as 350p and as high as £13 and are now 626p. British Land’s trajectory is similar.

Their investors usually collect dividends largely funded from rental income, but they also know that the value of the assets can be volatile. Less diversified firms have done much worse. This is territory for cautious financing and strong risk-management safeguards. It is not the place, you would think, for a small borough council in Surrey to borrow up to the eyeballs and take a concentrated investment punt in an attempt to offset a squeeze on budgets elsewhere. But read the section 114 notice issued by Woking borough council this week – in effect, a “we’re bust” document – and be amazed at the numbers.

On the one hand, the council is projected to have core funding – receipts from council tax, business rates and government grants – of £16m in the current financial year. On the other, it had a debt portfolio at the end of March of £1.8bn (yes, billion) thanks to an adventure into the world of skyscrapers and hotels, chiefly a 34-storey building complete with a four-star Hilton hotel in the town centre that has plunged in value. A loan impairment charge of £600m-plus is on the cards.

To cap it all, the council was found to have under-calculated its “minimum revenue provision” – sums that should be set aside annually to repay the principal loan to protect future council taxpayers – back to 2007-08. It means extra charges of £95m this financial year and an average of £75m thereafter.

Versus its council tax receipts, Woking is thought to be the most indebted local authority in history. This line from its 114 notice captures the size of the mess: “If the additional charges of circa £75m in each year were to be funded by service reductions, this would mean the council could no longer afford to provide any services at all and would still see a net budget shortfall.”

Residents should expect an increase in council tax bills, but some form of central government bailout looks inevitable.

How did it happen? Well, the backdrop is well known. The pre-2020 arrangements via which local authorities could fund investment by borrowing from the Public Works Loans Board (PWLB) were notoriously loose. In 2020, the public accounts committee warned of a disaster in the making as Covid hit commercial property prices after a 14-fold increase in local authorities’ borrowing for investment over four years. Lending criteria, or policing of the “prudential framework” councils must consider, was tightened.

In Woking’s case, the 114 notice shows the council had advanced £1.3bn – money borrowed from the PWLB – to joint venture companies, notably Victoria Square Woking Ltd, in which the council held a 48% stake and a Northern Irish developer, Moyallen Holdings, held the majority. Then the value of the assets fell. Local taxpayers will surely want fuller answers to matters briefly described in three paragraphs of last month’s 47-page review of Woking’s finances by the three commissioners appointed by the Department for Levelling Up, Housing and Communities.

Investments by the previous Conservative leadership “were made with little provision or consideration of council capacity and capability to manage these programmes effectively and efficiently,” it said. Presentations to full council were “very high level and there is little evidence of the commercial risks that members would be required to consider.”

The previous chief executive was given delegated responsibility to spend up to £3m on regeneration projects “without formal recourse to the executive or council”.

On land acquired in 2015 and 2016, it stated: “Enquiries indicate the paper trail is limited in respect of valuations, shareholder directions and company board minutes for the acquisition.”

After “content redacted for commercial sensitivity”, it added: “It is unclear whether some of this land was acquired at market rate based on a robust valuation to ensure value for money.”

One hopes the commissioners will be more expansive in their next report.