Why do you find it hard to believe that "anything like £5000 would be spent on decoration in a council property"?
I am genuinely interested in what makes you think that.
My friend lives in a council property. Her and her husband both work full time. They have put a new kitchen in their house, a new bathroom, carpets, painted, decking and lights in the garden, blinds and curtains to fit the windows. If they were asked to move for redevelopment i would have no objection to them receiving £4,700.
Don't forget that the redevelopment of the site will no doubt be more intensive and provide more homes than are currently there. They will also be cheaper to maintain and many will probably be sold off as shared ownership. This isn't cash being given away, its being redistributed.