Enormous potential for public sector real estate outsourcing

Copyright: David Lawson – Financial Times 2002


A new model for public sector buildings emerged in the closing years of the last century as the UK government began selling vast swathes of property. It took on the private sector not just as a landlord but to supply a range of property services including security, cleaning and repairs. Other countries quickly got the message. More than 15bn Euro was raised across Europe last year from outsourcing  – almost half from public or quasi-public bodies, according to consultant Jones Lang LaSalle.

   But the model has changed. The original, called PRIME, saw the UK Department of Social Security outsource everything from ownership of buildings to provision of facilities management. A similar deal, called STEPS, was struck for Customs & Excise and the Inland Revenue. Current moves are more restrained, involving fewer buildings and less comprehensive outsourcing.

    The drivers have also evolved. At first the UK government simply saw a way of raising money. When  the economy improved that was less pressing  but the revolution continued because public bodies wanted the benefit of  smooth, predictable budgets, says Stuart Lang  of Jones Lang LaSalle Global Consulting. They welcome the chance to offload ‘lumpy’ spending such as new buildings and can also avoid development risk. Specialists can also offer significant savings in service costs, says Ian Ellis, chief executive of Land Securities Trillium, which won the PRIME project.

  But the original models are unlikely to be replicated.  PRIME and STEPS involved hundreds of premises  spread across the UK, giving private sector suppliers the range and flexibility to extract added value from economies of scale and development profits. Most remaining departments have much smaller estates. The Home Office and Treasury, for instance, have effectively set up joint ventures under which the private sector will build and maintain a few headquarter buildings.

  Nor does everyone want to wrap up property with service provision. In mainland Europe deals have tended to involve  more restricted sale and leaseback rather than full outsourcing, such as the 2.97bn Euro sale by France Telecom to GE Capital, Goldman Sachs Whitehall Fund and CDC IXIS.  Future outsourcing is more likely to be a compromise, where public bodies pick the combination of services they want. ‘It will be more of a mix and match,’ says Ellis. The UK Ministry of Defence, for instance, has one of the largest outstanding estates but much of it is unsuitable for private sector skills. It may, for instance,  offload office blocks and some facilities such as catering but hold on to weapons establishments and security services.

     But the potential still remains enormous. Other countries have barely started their transition, says Olivier Piani, Paris-based  managing director of GE Capital UIS. France is on hold while elections are held, and other countries like Spain and Italy are still considering the possibilities.  But he expects transfers to the private sector to accelerate once these barriers are overcome.

  ‘Every country is under some economic strain because of issues such as aging populations and underfunded pensions. They will be increasingly interested in ways of raising resources,’ says  Robin Priest, chief executive of Mapeley,  which won the STEPS contract. The group  aims to quadruple its business by  shifting emphasis to mainland Europe.

  Central government and quasi-public bodies are not the only targets. Local and regional authorities also own vast amounts of property and are becoming just as desperate to unlock capital. In the UK the first flush of interest came with outsourcing services such as street cleaning but many are now working behind the scenes to see if they can release capital locked up in bricks and mortar. Ellis says LS Trillium has been talking to several London boroughs.

   The idea could even migrate into the US. Despite the smaller proportion of real estate in public hands, local and state bodies still have a substantial investment in buildings. ‘With the continuing pressure on the economy, this could become a new area for appraisal,’ says Priest. He has a particular interest  because one of Mapeley’s major backers is George Soros, who funnels US money into real estate.   

    But there are barriers to overcome. Outsourcing usually involves transfer of staff such as property management teams. Rules are much tougher about transfers and redundancy in mainland Europe, says Ellis.  The possibilities among European quasi-public bodies is limited by the quality of their assets, which are often poor. UK local authorities have a rag-bag of buildings ranging from courts to schools, often in secondary locations. Investors could try to cherry pick the best, leaving many local councils struggling to support the rest. There are also potential complications if outsourcing becomes a political football.   None of these barriers is considered  high enough to discard potential new business but advisers recognize that outsourcing will be far more complex than many anticipated.