WeWork and Spelthorne Borough Council have attracted more column inches than most in the real estate sector over the last few years, with both experiencing rapid ascents into the public consciousness before a variety of internal and external factors have combined to pose grave challenges to their respective business models.
Their worlds have collided in recent days as WeWork requested – and received Council approval for - a waiver of 18 months’ rent at its premises at 12 Hammersmith Grove in West London in return for a 5 year extension of their current 20 year term. Spelthorne Borough Council acquired the site in 2018 as part of their £1bn investment into commercial real estate, funded to a large extent by cheap borrowing from the Public Works Loan Board.
The Council – whose leader resigned this week amid calls for his removal (but not before giving the green light to the waiver) – are said to have approved the WeWork concession rather than risk losing the tenant from the building altogether and being forced to cover vacant costs at a time where there is little tenant demand for large office premises.
Spelthorne’s rent collection figures for the March quarter were surprisingly robust across its sizeable commercial real estate portfolio (91%) but the waiver agreed with WeWork is indicative of the difficulty being experienced by both private and public sector landlords, with rent collection figures likely to be low in June and to stay low for at least the next two quarters.
The difficulties experienced by Spelthorne with their investment in Hammersmith also points the spotlight on the wider issues facing local authority funding at present.
As discussed back in May, the Government have launched a consultation into the future of Public Works Loan Board funding (which has been extended to 31 July 2020) and look set to clamp down on the availability of PWLB lending for local authorities where such funds are not being used towards housing, infrastructure and/or public services.
The Treasury have concerns about the previous use of PWLB borrowing to fund investments in commercial real estate portfolios which are now “taking a battering” during the coronavirus pandemic and the risk that such losses end up coming out of the public’s pocket and damaging the availability of essential community services.
The potential PWLB funding clampdown comes at the same time that Councils do battle with social care bills increased by Covid-19 with budgets depleted by reductions to Council Tax receipts, on-going closures of Council-run leisure centres and swimming pools and reduced demand for traditional fundraisers such as car parks, offices and even airports.
A number of Councils – both with and without exposure to PWLB borrowing - are now predicting shortfalls for the coming year despite more than £3bn having been made available in emergency funding by the Government and the prospect of ‘section 114’ notices (which effectively trigger a ban on all non-essential Council expenditure) has begun to increase in recent weeks as the long term cost of Covid-19 on Council budgets starts to come into focus.
WeWork has asked to skip millions of pounds of rent payments owed to Spelthorne Borough Council, creating a major headache for the tiny local authority that has borrowed more than £1bn to bet on commercial property.