A council faces “difficult choices” in tackling “substantial” financial challenges, councilors have warned.

Surrey Heath Borough Council must find an extra £4 million a year to cover interest on loans for property investments.

In 2016 the council borrowed to invest in a property portfolio including a shopping center and the former House of Fraser store in Camberley, with the debt estimated at £170m.

Liberal Democrat councilor Leanne MacIntyre, the executive member for finance, said the council faced an “unsustainable” funding gap within two to three years and rising debt.

“Even though difficult choices lie ahead, the council is prepared to face them,” she added.

High inflation, interest rates and demand for services, such as affordable housing, have also been cited as reasons for rising costs.

There were also concerns that the council’s income from commercial properties had been reduced because footfall in Camberley had not returned to levels seen before the pandemic.

Ms MacIntyre said: “The council has secured long-term fixed rate borrowing through the Public Works Loan Board (Government) and other financial institutions.

“The remaining £80 million was funded by short-term variable rate loans reflecting the Bank of England base rate over time.

“Interest rate increases in recent years have resulted in significantly increased indirect service costs related to interest on our debt.”

Council leader Shaun Macdonald added: “The reality is that most councils are facing significant financial pressures. Rising inflation, wage demands and growing demand for services, as well as more complex needs, have created a projected funding gap in the sector of £6.2 billion over the next two years.

The council was Conservative-led at the time the properties were purchased.

Jonny Cope, the party’s councilor for St Paul’s ward in Camberley, said Surrey Heath had done nothing unusual in borrowing to invest in this way.

“I think municipalities should improve the quality of their city centers. The reason for the acquisition in the town center was to contribute to the regeneration of Camberley. It wasn’t to make a profit.