INVESTMENT ASSETS Stalemate: Despite holding over £40bn in property assets local authorities are having to think several moves ahead

Iain Mulvey

Iain is an experienced regeneration and business development professional. He spent the first six years of his career working with the Regional Development Agencies, and the next 20 years working in private practice with GVA/Avison Young, Carter Jonas and since May 2026, Graham + Sibbald. During that time he has worked with many local authorities across the country, advising on a range of issues across investment, development and regeneration, as well as with central government departments, corporate occupiers, pension funds and overseas investors.

Iain looks at recent investment markets and explains why local authority activity has been limited. He anticipates that this is likely to change later in 2026. 

Chessboard Strategy

Context 

Local authorities now control over £41bn of directly held property assets, either via direct holdings, or via the Local Government Pension Scheme (LGPS). This breaks down to around £13bn of investments acquired over the decade to 2024, and around £28bn held in the LGPS schemes which are currently still going through a pooling process. To provide some context, throughout the 2025 calendar year, it is likely that once final numbers are totalled up, a little over £40bn was traded across the entire commercial real estate market in the UK. This makes local authorities a major player in the UK Investment market, particularly in the regional markets, as they have not featured prominently in the central London marketplace which makes up a significant proportion of the UK Investment Universe. 

Limited activity 

So why so little activity? In terms of new direct acquisitions, the appetite for local authorities to acquire more stock was sharply curtailed by two things – the inability to purchase anything outside the authorities’ boundary, and the sudden increase in PWLB borrowing costs. 

In tandem, those two activities had a dramatic effect in terms of reducing the flow of spend to a dribble. In many respects this in unfortunate, seeing that yields have since increased across virtually every asset class that was in the sights of local authorities and would now in general provide much greater value. This also helps to explain why we haven’t seen the mass sell-off of directly held assets that many thought would come over the last 18 months. While £13bn may have been deployed in assembling the portfolios, the reality is that the value of those assets now is likely to be significantly reduced. This is not necessarily down to bad choices on which properties to buy at the time, or poor asset management, but more reflective of the market in general. Yields have moved out across virtually every asset class, with the exception of central London where local authorities have rarely focused, and overall sentiment is far weaker. 

This is not unique to local authorities, Real Estate Investment Trusts continue to trade at a big discount to net asset value and the market as a whole has seen reduced levels of activity for the same reasons. In general terms, there is still a gap between vendors’ expectations and what purchasers are prepared to pay, although there are indications that the equilibrium is beginning to return in some markets. The challenge to local authorities remains the same, however, in terms of the need to generate additional revenue, and therefore selling those assets at a lower price that they paid for them creates a number of issues: 

• Firstly there is the crystallisation of the loss – not popular either financially or politically 

• Secondly there is the loss of income – the revenue received is still needed to balance other priorities and in the vast majority of cases, those assets are still creating steady revenue 

• Thirdly, what to do with the capital receipt – sale proceeds may provide a helpful short-term solution to immediate issues, but only serves to push the issues further down the line 

• In some authorities the picture is even more complicated due to local government reorganisation. In places such as Surrey, the landscape around direct property ownerships under the two new unitary authorities from 2027 will necessitate a lot of thought, given that both the county and the boroughs bought investment assets and not always inside the county. 

Local Government Pension Scheme portfolios 

In terms of the LGPS portfolios, the pooling of the vehicles is due to complete in March 2026. Until this process has been completed, we are not likely to see much activity. Once complete however, it will be interesting to see how the approach to the management of those funds changes in relation to the property assets that they hold. A major part of the ethos has been to pool the funds to allow the LGPS to invest in larger projects and infrastructure. Logically, you would expect that an obvious outcome would be for the new vehicles to dispose of smaller assets which are time intensive to manage, have no upside in terms of asset management planning, or where the business plan has been completed.

There is a lot of that stock making up the ‘tail’ of some funds prior to pooling as they simply did not have the capital to deploy on larger assets, and understandably, wanted to keep the portfolio diverse as a risk management strategy. While this may take some time to untangle, there are reasons to suggest that this approach may well pay off: 

• Firstly, many of these assets were bought well and assembled over a long period of time, meaning that losses measured against the purchase price and holding cost are far less likely 

• Secondly, there is still strong demand from private investors and family offices for smaller assets 

• Thirdly, the market is showing some signs of recovery and therefore by the time fund managers have recalibrated the portfolio strategy, any sales may emerge into a stronger market where yields and sentiment are more in the vendor’s favour. 

Overall, therefore, I expect to see the current situation be maintained for the early part of 2026 at least. This is mainly due to market conditions, but also local elections in May, and ongoing administrative issues around the pooling of the LGPS. This may however prove to be fortunate timing. 

Changes in sentiment? 

Here is why I think the stalemate may break in Q3. There is evidence to suggest that recovery is already under way in some sectors. In general terms, despite the often screaming headlines from the press, the UK economy is not an outlier to the performance of its peers in the G7 or Western Europe. The budget did not deliver anything like the level of distress that was anticipated and further cuts to interest rates are forecast for early in 2026. Investor sentiment is also far stronger for 2026. 

We are seeing increased international investment activity from overseas, including in the regions from new entrants such as French Société Civile de Placement Immobiliers, and UK Funds such as Aberdeen and Royal London, are now in acquisition mode. As a result, I anticipate investment volumes for 2026 will exceed those for 2025 which will drive yield performance. 

In many cases, despite massive variation across asset classes, the potential recovery coincides with those asset classes often held by local authorities. In particular: 

• Offices – an overall lack of new supply, continued tenant demand, and increased level of staff returning to the workplace should see rental growth in the office sector. Regional offices have lagged behind their central London counterparts, but look exceptionally cheap at this stage in the cycle; well located offices with strong ESG credentials should come back in favour. A little while ago, Canary Wharf had been completely written off by many as an office location, but has witnessed a significant number of new lettings and an uptick in activity over recent quarters. Regional office rents are now starting to reach £50 psft in the major regional centres. While this is likely to make new development more viable, it will also drive on rents across the market as a whole 

• Shopping centres – having gone through an extraordinary low, shopping centres are set to rebound particularly through rental rather than capital growth. With so little new shopping centre development taking place, strong existing centres should perform well. 

For those local authorities looking to recycle investment assets that they hold, generate capital receipts or pooled LGPS funds, recalibrating their portfolio, Q3 and Q4 2026 may offer a more risk free environment for doing just that.