Regulators have thrown doubt over Network Rail’s plan to buy the Grand Central shopping centre after saying the business case was “not compelling”.

State-backed Network Rail, which operates Britain’s rail infrastructure, is in talks with Birmingham City Council over a £200 million purchase of the giant shopping centre over New Street station which will be anchored by John Lewis .

However, the Office of Rail Regulation (ORR) – which would have to approve the deal – has cast a shadow over proceedings by questioning whether it delivers value for money.

 

Network Rail, which operates 20,000 miles of Britain’s rail track, wants to make Grand Central, which is due to open next year, its biggest ever retail purchase, but a spokesperson said that was reliant on ORR approval.

In a letter seen by the Post, Daniel Brown, strategy and policy director at the ORR, writes: “Our assessment is that the business case for the acquisition is not compelling. Network Rail has chosen not to seek a completely independent valuation in recent months. Nor are we satisfied that Network Rail’s own due diligence process has included robust stress testing of the internal valuation and a comprehensive risk assessment.

“However, we consider that such a valuation and risk assessment was needed to ensure that Network Rail’s business case and due diligence process was demonstrably robust.

“Network Rail needs to invest where it considers that it will make the highest rate of return for that investment. On the basis of the data and models we have seen, the acquisition of the Grand Central shopping centre does not appear to provide sufficient value for money.”

Network Rail is currently working with the city council on the £750 million redevelopment of New Street Station and transformation of the Pallasades Shopping Centre.

The vast shopping centre, which includes Birmingham’s first John Lewis, will commence trading alongside the redeveloped New Street Station in September 2015.

Network Rail is embarking on a new five-year capital spending programme and Grand Central is central to that.

A spokesman for Network Rail said: “Network Rail’s commercial property activity plays an important role in helping to fund Britain’s rail network; all proceeds from these commercial activities are reinvested into the railway helping to build a bigger, better railway.

“The company is one of Britain’s largest small and medium-sized business landlords and operates over 500,000 sq ft of retail space at its stations up and down the land. While no decision on the future ownership of Grand Central has yet been made, the company can confirm it is in discussions with Birmingham City Council about a potential purchase, but an outcome is many weeks away. Any decision would be subject to the approval of the Office of Rail Regulation and the Department for Transport.”

The new centre will boast 40 stores and 20 restaurants and will create up to 1,000 jobs for local people, as agreed in special charter.

The likes of Joules, Cath Kidston, Fat Face, Jolie Papier and Monsoon Accessorize are the latest to sign up for space.