Government real estate outsourcing under fire

David Lawson - 2002


The UK government will learn that PFI is not necessarily a good way of providing space, according to the man who led the biggest property outsourcing ever seen. ‘Lots of people made a lot of money  but this should be about adding value for 20 years rather than smart ideas for the first five years,’ according to John Mason, who set up the 18m sq ft PRIME agreement while director of estates at the DSS.

  Investors like George Soros, who runs a closed-end opportunity fund, would be looking to get out in the short term. ‘There is a vital need for pension funds to come in with a long-term view,’ said Mason, who now runs outsourcing specialist Faro Consulting.

   Real estate partnerships which add value over 20 years were the real future of outsourcing, he told a seminar at the British Council for Offices conference in Edinburgh. And he warned occupiers they must take outsourcing seriously or lose out to competitors.

   Accounting changes will force companies to reveal property liabilities within a couple of years so they should be taking the opportunity now to carry out audits, said Rick Lawrence, of Land Securities Trillium, Europe’s biggest outsourcing specialist.  ‘This is not about raising capital. They can do that in other ways. It is about transferring risk, giving managers extra flexibility and freeing them to concentrate on core business,’ he said.

    The world has moved on since Trillium’s groundbreaking PRIME deal. The firm is talking to firms with no freeholds about creating flexible leasehold partnerships. Retailers are also looking at ways they can quickly change their high street presence to match market swings.  In the public sector, local authorities could take over as a major player from central government. Surrey County Council  is discussing a deal involving 70 buildings.   

   But outsourcing has to fit a business strategy based on accurate information. Many potential deals fail because of the cost of due diligence, which currently makes up 80% of fees, said Robert Kidby, head of property at lawyers Lovells. ‘We often find we can’t make a case for a partnership because the client cannot tell us what its current costs are,’ added Lawrence.

   The move to long-term real estate partnerships will accelerate as the benefits of deals like the Abbey outsourcing sink in. ‘These has given the bank a strategic advantage over its competitors,’ said Adam Calman of Cushman & Wakefield Healey & Baker. He is also confident that institutions will come into the market to provide long-term stability.   ‘We will look back at this time as the cusp of a major change in the way businesses treat property,’ he said.