As property braces itself for the Comprehensive Spending Review, Nick Johnstone considers the repercussions of a “once-in-a-century” moment in government property policy.

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A scruffy 200,000 sq ft office block is about to come on to the market in Edinburgh. Its occupier, the Department for Work and Pensions (DWP), is cutting costs and moving out.

One hundred miles further north in the small Highland town of Dingwall, call centre staff are fielding planning enquiries. They belong to an outsourcing company called Vertex. They have little understanding of the locations they are answering questions about, because as part of a cost-saving measure, their employer is Westminster City Council.

These are just two examples of how financial decisions taken in the heart of London affect the furthest reaches of the UK, from Bradford to Gloucestershire.

Ironically, their origin is the Treasury’s lavish headquarters, 1 Horse Guards Road, in Whitehall. Ten years ago, it was refurbished under a private finance initiative (PFI) contract. The £170m project introduced flexible working to the building, as well as spacious atria filled with natural light. But the Treasury will be paying for it until 2033.

Now staff there are having to bunch together, as chancellor George Osborne tries to squeeze in an additional 500 civil servants from buildings being vacated elsewhere in London.

And today, the pips will really start to squeak when Osborne unveils his Comprehensive Spending Review, trailed as the largest set of austerity measures since World War II.

Government spending will fall by 30%, or £83bn, over the next four years. RICS president Robert Peto calls it property’s “big moment” of 2010. Sources close to the Treasury say the scale of the cuts is “frightening” and a “once-in-a-century opportunity” to reconfigure government property.

The £6.2bn of immediate savings announced by the government in May has already begun with the whittling-down of public bodies, particularly those close to central government control. As revealed by Property Week (news, 01.10.10), the Cabinet Office has banned the signing of new leases until 2015 and the renewing of existing leases, which could save up to £250m in rent and running costs.

Arcadia Group owner Sir Philip Green ratcheted up the pressure last Monday, when he urged the government to manage its estate centrally and streamline procurement. Outlining the findings of the Cabinet Office’s efficiency review, which he was asked to chair, Green said 484 leases costing £47m a year would expire or reach break points within six months. These will now be terminated.

Telereal Trillium, which has an outsourcing contract with DWP for 23m sq ft of property, is already feeling the pinch.

“We’re like soldiers prepared for war,” says its chairman, Ian Ellis.

Ellis now has to fill Argyle House, the Department for Work and Pensions’ office in Edinburgh (pictured). Under the terms of Trillium’s outsourcing agreement with the government, it takes on responsibility for leases that the department exits. Over the next four years, Trillium will be saddled with a further 4m sq ft, as the department relocates staff. Ellis expects profits derived from the public sector to slide by 20%.

Quangos are also in the Treasury’s firing line. Last Thursday, regional development agency (RDA) Advantage West Midlands announced £34m of cuts to projects in 2010/11. Osborne had vetoed a £4.3m grant for the Agricultural and Horticultural Development Board’s £10m headquarters in Coventry, which will no longer be built. Up to £31m will also be shaved off Stoke’s regeneration plans.

Soon-to-be-axed RDAs have cancelled discussions on projects that are not legally agreed, and are scrambling to keep existing schemes alive.

“We know we’re being abolished, but we want to make sure the legacy is carried on,” says Tim Gebbels, strategy director at Advantage West Midlands.

Yet redundancies are already being made, and 34 of Advantage West Midlands’ 340 staff are due to leave by 22 October. Besides eight RDAs outside London, up to 180 quangos could be scrapped as part of next month’s public bodies bill.

Similar savings will drip into the rest of the public sector slowly but just as painfully. But councils have already begun to draft budgets for next year, based on an expected 30% cut in funding. They are forecasting tens of thousands of job losses (box, right) and are having to make promises to cut their operational estates accordingly. The impact on property, planning and regeneration will be severe.

“I’ve been around for a while, and this is a perfect storm,” says Adrian Wyatt, chief executive of Quintain. “It could be worse than the 1930s.”

Commercially savvy public bodies will make use of long leases and freehold properties to soak up staff from buildings being vacated. Local markets will then be flooded with secondary space, often in provincial areas that have few prospective tenants.

David Hunter, former chairman of the Scottish Property Federation, worries that his region is particularly over-exposed. “It will be very extreme. Mid-standard offices have been a happy haven of government. In the past, if you had a 15-year lease to government, you were home and dry.”

Cuts will also slow down development, as planning teams become over-stretched. Fees have dropped as applications have dwindled, and the £150m Housing and Planning Delivery Grant has been withdrawn. Planning will be hurt if it is considered a “back office” or administrative cost, and local authorities might choose to follow the lead of Westminster in outsourcing to cheaper locations.

Bristol City Council announced its draft budget last week and is expected to slim down its planning team from 48 officers to 16. Unions say this poses a threat to development locally.
“The Bristol situation is not unique. It will happen across the region,” warns a local planner.

Stuart Robinson, head of planning at CB Richard Ellis, says development is bound to suffer: “It’ll be tough out there. Some local authorities are difficult to interact with already, but they’ll be less accessible than ever.”

Redundancies and capital funding cuts will cleave deeper still into regional economies. Large PFI projects have been abandoned for now, forcing contractors and developers to fish in an ever-diminishing pool for work. The government is considering phasing back in the £55bn Building Schools for the Future programme, which it scrapped as soon as it came to power, but only for the neediest areas.

In Bradford, all these cuts will combine to remove up to £1bn from the local economy in the next four years. Private growth should plug these gaps, the government says.

It is offering a £1bn Regional Growth Fund to help, but this will be spread thinly across the country.

“Its outcomes will be inconsequential,” says Tony Reeves, Bradford Metropolitan District Council’s chief executive.

Already, investors are turning their backs on areas that are over-exposed to public sector workers.

Helen Gordon, director at Legal & General Property, is taking this into account when assessing retail options. “We’ve been doing forecasts based on public sector employment,” she says. “As the public sector falls away, what is the capacity of the market to recover?”

Axe minister

The answer largely depends on how heavily Osborne swings the axe. If the public sector is told to save too quickly, rash decisions will fail to provide long-term savings. Peto says snap sell-offs could be fatal.

“The public sector needs to be encouraged to be strategic. Cutting in the real estate sector has knock-on effects, because it contributes 11% of GDP.”

Sources at the Treasury say there is “wiggle room” for the execution of cuts, because it is uneconomical to exit certain contracts. But rumours suggest this will apply to high-profile, headline contracts in areas such as defence.

“In PFI, it’s embarrassing to cancel contracts,” says Julian Rudd-Jones, managing director of Kajima. “But it’s not as onerous as some, like those Royal Navy [aircraft] carriers.”

If the government demands 30% cuts from local authorities next year, this could pose a threat to asset management itself.

“The big issue for budgeting now is that we don’t know the timing of when the cuts will hit us,” says Reeves. “It could be a big slug of cuts next year and we will be forced to make short-term decisions.”

Evidence is emerging that the government is aware of the risks too. As part of its localism agenda, it is devolving control over finances to local authorities. It has promised to introduce
tax-increment financing (TIF) to allow councils to borrow against future business rate revenue.

Back in Edinburgh, an £84m TIF-funded regeneration scheme has just been approved. And the housing revenue account subsidy introduced last week will also hand greater control to councils in managing their housing portfolios. This could provide them with much-needed revenues for regeneration. However, these proposals might not be fleshed out and implemented until as late as 2012.

The collapse of Lehman Brothers in September 2008 was a first body blow for the property world. Now some industry leaders fear that the Comprehensive Spending Review will be a second, as government tenants, one of the pillars of the occupational market, are wiped out at a stroke.

All the more reason to regret the way in which Britain ran up a gaping national deficit, which now urgently needs to be closed.

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