Drastic surgery for BT’s vast estate

Copyright: David Lawson 1996

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It sounds like an estate manager's nightmare: more than 8,750 buildings in locations ranging from tiny villages to prime town centres right  across the UK. The variety is just as wide, stretching from prime office parks through ageing provincial towers to  sprawling engineering centres and obsolete brick boxes.  Just  keeping  track of such a behemoth would be a major task. But how do you set about   performing  drastic surgery after a tough board of directors demands cost reductions? Selling out is no answer. Who would want to take an empty Sixties office block with structural problems and a complex hierarchy of headlessees? What use could anyone find for a shed built to hold a mass of chattering electronics?

   John Pike does not seem to suffer from disturbed sleep, however. The head of portfolio management for BT North was used to the complexity of administering BT's massive estate outside the South East. Now he has added an extra responsibility as general manager of Southgate Developments Limited (SDL), a subsidiary set up to exploit the elimination of a surplus equivalent to more than one Canary Wharf every year.

 Much has been made of the high-profile assets BT is shedding in the search for cheaper space away from central London. But as  big a game is being played outside the M25 as the company tackles  a 6.7m sq m (72m sq ft) estate weighed down with unglamorous provincial office blocks and obsolete engineering centres.

  Some 1.5m sq m (16m sq ft) has gone  since 1992. Surprisingly, this is more a management than a complex technical exercise.  Only rarely can exchanges be stripped and sold for alternative uses. Advancing technology has shrunk exchange equipment but this usually  leaves redundant  space within existing buildings rather than making them completely redundant.

  At Motherwell in Scotland, for instance, a 2,780 sq m (30,000 sq ft) building has been reshaped in a œ2.3m project which released the top two floors for a call centre while essential exchange equipment could be retained on the ground floor.

   Most of the surplus involves  pure offices and storage, but that does not make things much easier.  'We can't just sell  buildings,' says Pike. 'Most of our provincial offices, for instance, were built in the Sixties and Seventies and there is just no market for them.'

 His task, therefore, is to  find alternative uses.   Pike takes a market-led approach. Cost-cutting  targets come down from the main board and he demands schedules from regional managers on how the estate can contribute. There are some natural choices for disposal. Many office centres, for instance,  do not meet modern space requirements. BT is no longer a hierarchical organisation, relying instead on teamwork, says Pike. That demands flexible "easy-in, easy-out" space on larger floor plates in low-rise blocks.

  SDL has been created to  acquire obsolete stock and devise ways of recycling to produce the best value and maximise shareholder value. Sometimes that can be for sale; sometimes for development.

 This  has sparked interest in an industry hungry for new opportunities, and Pike is happy to accept that he needs partners.   'As a direct BT subsidiary, we   have to be risk-averse,' he says. The aim is to spread any risks by joining forces with top developers.

  Every surplus building is being assessed according to location, potential use and  redevelopment cost. Some offer the possibilities of pre-lets and pre-funding, encouraging SDL to stay involved and hold onto a share of the development profit. Many, however, need to be reworked and sold on.

  The shakeout has thrown up a wide spectrum of solutions. At one extreme are straightforward disposals such as an engineering centre in McDonald Road, Edinburgh, sold to Barratt for residential development. But even that kind of deal is  not as simple as at first sight.

 'A lot  of work goes into checking local plans to see the possibilities of redundant sites,' says Pike. Chapman Warren are retained to do this  across the UK and Jones Lang Wootton inside London.

  This is not just a matter of spotting redevelopment potential within the framework of local policies. Sometimes planners need a nudge in the right direction. This is particularly important for  for telephone engineering centres (TECs), which have declined since BT switched to direct communication with workers in their vans via mobile phones.

 In Edinburgh, for instance, the TEC was surrounded by housing. A little negotiation with the council led to the local plan boundary being altered to enable non-employment development. At Coppitt's, a former depot relegated to storage on London's North Circular Road, a less radical alternative was available. This is car-hunting territory, so SDL bought the freehold from BT, won planning permission for a showroom and sold on to Fiat.

 'We can get money up front this way rather than get involved in specialised development,' says Pike.  But there are times when the prospect of future profit is strong enough to maintain a role. At Yeading, in Hayes, Middlesex, planners were persuaded to allow   the 20-acre transport depot to be used for housing and 11.600 sq m (125,000 sq ft) of retailing.  Then Chartwell Land was chosen as a development partner.

  'Where we can see a pre-funding and pre-let probability, we will take a slice of the action,' says Pike. But SDL is structured for trading rather than development, so it needs skilled partners. Pike's aim is to  establish relationships with a few powerful names like Chartwell he can trust. Funds are also welcome to join the game providing they can either offer development expertise or help appoint a project manager.

 There are other options for the few telephone exchanges which have been completely cleared. At Stratford, for instance, the building was converted into halls of residence for the local college.

 'Once the equipment is cleared, an exchange is nothing more than a big brick box,' says Pike. Often these are in residential areas and easily recycled into flats - particularly since the craze for loft conversions took off.

  Office buildings are the current focus for SDL repackaging skills, however. Heron House, a 14,400 sq m (155,000 sq ft) block in central Glasgow is a classic example. It was a mess:  the wrong size and shape, structural problems and a plethora of leaseholders and ground landlords. Staff had been moved out  but BT was stuck with a rent bill of  œ760,000 a year.

 Crucially, it is an excellent development site, and Pike set about preparing the ground by taking out all the other parties. 'Now we are in control of our destiny,' says Pike. He has a blank sheet to explore   possibilities such as working up permission for change of  use and deciding whether to sell or bring in a partner.

 That decision has already been made at Forest Gate in east London, where SDL went through the same process on  a 10,708 sq m (115,000 sq ft) Sixties office block. This has won permission for a switch to 1,680 sq m (18,000 sq ft) of shopping and parking but  will be sold on because of the different perception of development risk. At Horfield in Bristol, however, SDL will carry through change of use from 6,700 sq m (72,000 sq ft) offices and computer hall  to B1 use with potential for retail and leisure. Pike feels he can create an attractive institutional investment after disposing of much of the site for shopping.

   Sometimes his hands are tied by other circumstances. Also in Bristol, St Clements House, a 7,250 sq m (78,000 sq ft) office block,  would normally have been demolished and redeveloped because it is an obsolete building on a prime site. But Pike could not sell because cables run beneath the site to a neighbouring active exchange.  Wearing his estate manager's hat, he was also obliged to provide high quality space for local  BT staff, and planning restrictions meant that rebuilding  would offer  less space. This has, therefore, become a flagship renovation exercise. A total of £5.5m has gone into  stripping  the building back to the frame and  recladding with a more attractive skin. Advancing technology has also helped the economics. Heavy exchange equipment is now gone, and with it the three-inch concrete floors. That has provided the bonus of increasing staff capacity from 400 to 500 without any increase in overall loadings.