According to new research by CB Richard Ellis, governments across Europe are examining their property portfolios and disposing of surplus property assets to prop up their ailing coffers. Martin Guest, managing director of CBRE in Birmingham, looks at whether there are opportunities for the local authority in Birminghamto follow suit.
The UK Government recently announced that it is to put £20 billion of commercial property assets on the market.
With concerns being expressed about the depth of investor appetite for government bonds, selling off real estate is one way of raising much needed capital.
In the current market investor demand for vacant property is limited. However, the purchase and leaseback of good quality occupied stock is attractive and, let’s face it, there’s no covenant like a public sector covenant.
Of the UK Government’s £370 billion real estate portfolio, two thirds is thought to be owned by central government, with the remainder in local authority hands.
According to Birmingham City Council’s web site, the authority owns more than £1,500 million of ‘non-housing’ property – a major portfolio including more than half of the city centre.
Over the years, schemes have been mooted for leveraging these assets. Birmingham’s last phase of major, public sector led city centre regeneration was in the 1990s, and included Brindleyplace and ICC. This was largely paid for by the European Union, a route no longer open to the city. Initial work on the city centre masterplan by Professor Michael Parkinson suggested borrowing against the council’s property bank in order to pay for city regeneration schemes. However, restrictions on local authority borrowing, means Birmingham would need dispensation from the Government to proceed. Although it has failed to secure this, the current financial climate and the urgent need to use public funds to kick-start the economy may force the state to rethink.
In the meantime, however, Birmingham is examining how it can better use its property assets.
Part of this is an examination of how the city council can occupy space more cost effectively. The key tenet of the council’s “Working for the Future Business Transformation Initiative” is to re-house its staff in modern, sustainable and efficient office space by 2014. A refurbishment programme is proposed and some buildings, both freeholds and leaseholds, will be vacated to provide future development opportunities and, indeed, cash.
At present, the council has 9,000 administrative staff working from 55 buildings totalling some 1.2 million sq ft. The programme is aimed at saving £100 million over 25 years, by optimising space usage and lowering the council’s carbon footprint.
It has been reported that the council wishes to reduce the number of buildings occupied to just ten, although to date it has remained understandably tight lipped about which buildings are surplus to requirements.
At present, two major refurbishments are underway – Lifford House and Number 1, Lancaster Circus. One new build, Sutton New Road, comprising 35,000 sq ft and housing 400 staff opened last year, and a proposal to build a 180,000 sq ft premises at Woodcock Street in Aston is under consideration.
The future of Louisa Ryland House, on Newhall Street, is also on the agenda. Although the council has said it will not sell any city centre freeholds it may consider entering joint ventures for potential development sites.
One constraint on the council is that it must first offer surplus buildings to its public partners, such as the fire service or police. If they remain surplus, they can be sold.
In the three years to March 2008 the council raised £150 million selling surplus land and property. Although the remaining portfolio contains a lot of second hand, peripheral space which may not entice an investor, there are still some jewels. Certainly, the portfolio has plenty of mileage remaining and with a new library and city park to pay for, it may only be a matter of time before some of these assets come to the market.
But is now a good time to sell?
Certainly the council may have missed the boat – through no fault of its own – with sites that were primarily geared for residential development. This market has, quite simply, collapsed, and will take time to recover.
Nor does the council necessarily need to sell all its silverware. Some of the most exciting projects in the development/regeneration pipeline – the wholesale markets site, Baskerville Wharf and Paradise Forum – are to be delivered in partnership with the private sector.
Furthermore, they don’t want to be accused of selling public assets at the bottom of the market. Both state and local authorities will need to make the case for such sales carefully.
On the other hand, at a time of economic hardship, when tax increases would be politically unpopular and economically counterproductive, the public sector could feel that the time is right to introduce these proposals.
With equity investors and debt providers active in the market focusing on the quality of tenants and length of income streams above all other considerations, it is likely that public sector sale and leasebacks will be viewed favourably by the market.
What’s more, there are buyers out there who are well positioned and well leveraged, but struggling to find good opportunities.
Given the potential attractions to buyers and sellers alike, transactions involving public sector buildings could remain a significant feature of the market over the next few years.
* Copies of CBRE’s research paper, ‘Governments Turn To Property Sales’, are available at: www.cbre.eu/research.