Public sector real estate pioneers innovation

Copyright: David Lawson - Property Week 2002


Innovation and inventiveness are not terms tossed around casually in discussion of the public sector. But they will be in future, according to a growing number of advisers  enjoying a new world in which ideas for releasing  assets into the private sector are picked up and developed.

  ‘A few years ago you would not have bothered suggesting anything out of the ordinary. Now there is much more freedom,’ says Lester Wagman an associate with Knight Frank.   Land swaps, joint ventures and ‘special purchase’ deals with private partners are all lubricating what until recently was a deadly turgid process of wheedling out land and buildings even when public bodies were desperate to sell.

   The market is awash with stories about PFI and PPP deals but beneath these is a raft of smaller deals which show the public sector is moving away from its traditional conservatism, according to Knight Frank partner Alex Dawson.

  He points to one project still at the confidential stage by the Ministry of Defence ‘not renown for its innovation in property dealing’ which almost doubled the value of one site by moving away from convention.. It set up a joint venture with surrounding site owners to release marriage value and create a major food store site.

  In another deal an NHS trust desperate for space in north London found what appeared to be a good location where the existing leaseholder wanted to move out. The problem, as in so many cases, was that the landlord was happy to enforce the lease unless it received a substantial reverse premium.

  The trust and its advisers came up with an alternative under which the landlord accepted a £500,000 refurbishment by the existing tenant instead. This was work the Trust would have needed to do anyway, but by structuring the deal this way it saved a substantial amount in  VAT which could not have been recovered.

  The driving force behind this surge of innovation includes changes brought in by the 1999 Local Government Act which told public bodies to look beyond balancing their books each year. They have to show they have taken proper steps to provide best value and perform against key indicators, says Wagman.

  Another unlikely pairing of terms has also reinforced this trend, he says. Sexy accounting. And all the more surprising, this has come from that bastion of stern Victorian rectitude, the Treasury.

  ‘The public sector had been wed to its long-serving instruments of clawback and overage, which suffer from lack of transparency and have been difficult to enforce,’ he says. A new open-mindedness is leading government departments and their advisers to be much more creative.

  Most are remarkably tight-lipped about what they are up to. ‘It is very early days, and public officers want to make sure things are tied up before going public,’ says one leading property consultant. ‘But I can tell you that literally dozens of these innovative deals are in the pipeline. Whether they all come to fruition is almost irrelevant. The fact that public bodies are being so receptive to innovation is the crucial point.’

  One of the new freedoms opening up assets to the private sector is the way they are valued,  says Dawson. Marriage value has long been a reality in the private sector but strict adherence to RICS Red Book rules meant public bodies could not take advantage. Negotiations had to take place on valuations which ignored  the fact that a site or building might be worth far more to a neighbour or buyer with special reasons for wanting to be in the location.

  Now public bodies can work exclusively with ‘special purchasers’ which offer well in excess of market price. ‘In the past they would have had to go out to the market at the basic valuation, so this saves time and expense in marketing and negotiation,’ says Dawson. And, like the MoD joint venture with its neighbours, it can yield big profits.

  In some cases marriage is the driving force for both sides. Land swapping is high on the agenda where a buyer may covet a particular public asset and rather than pay extra for the goodwill element, offer a similar asset in exchange that enhances the public body’s holding.

  One problem is the inevitable suspicion about private deals but he says they have to run the gauntlet of the  National Audit Office. New rules also mean both local authorities and central government bodies have to publish accounts which illustrate what they have been up to. Over the next couple of years these will be thick with information on deals now too sensitive to reveal.       

  The NHS is proving one of the most adept at playing these new rules. Big PFI schemes tend to grab all the news but even here there are nooks and crannies that can be filled by moving the goalposts ever so slightly. Getting private money into local health centers, for instance, has been more of a problem than hospitals because they are too small to offer the critical mass required by investors, says Wagman. NHS Lift deftly got around this by pooling several centers through a pioneering consortium in east London. This will draw £15m  into primary care facilities.

  The leading role taken by the health services is not just down to enlightened management, however. None of these innovative techniques  are feasible unless public bodies  can pinpoint suitable assets. This requires comprehensive estate strategies that define not just the underlying asset value but its operational value and cost of decommissioning.

 The NHS has been doing this for years, says Wagman. ‘Most other public sector organizations have their own mechanisms but not all are as comprehensive, robust or up to date as would be ideal. At he very least they need to be able to make a convincing case that they have a full grasp and understanding of their asset base and hold proper records.’

  In other words, every head of property should have a plan which covers not just maintenance but disposals which match the business strategy. That may sound ambitious, considering that few private sector companies boast such a sophisticated level of analysis.

   Wagman also admits that such plans can be difficult for bodies going through seismic management and organizational changes. Then there are the ebbs and flows of political demands and the  blurring of the reason for selling assets in the first place. Is this to improve a body’s efficiency or just to raise cash?

  Naturally, he sees a role for bringing in property consultants to give an independent view as well as showing a commitment to the challenge of meeting the new ‘best value’ rules. But the fact that advisers have already helped open up new areas of inventiveness and innovation shows that this is not just a  punt for winning business.

   PFI and PPP have been dogged by  accusations of profiteering and poor public returns. Perhaps when the  groundbreaking deals lying below these headline schemes work through the pipeline and surface over the next year in public bodies’ accounts it should become increasingly clear how private sector skills can add value to public sector assets.