This year could herald the arrival of a new contender in the world of listed property: the government.

This week, the Property Unit embarked on an investigation into making savings from the government’s £370bn property portfolio, which will include exploring the possibility of establishing public sector property and service companies.

The investigation, which will take a minimum of three months and be followed by a public report to the Shareholder Executive, will also consider whether such companies should be listed on the London Stock Exchange as REITs.

A statement from the Department for Business, Innovation and Skills, to which the Shareholder Executive reports, confirms that the Property Unit will consider new management and ownership structures for the prospective division of the estate and engage the private sector in the process.

“The new Property Unit will explore different management and ownership options for the public sector estate — including the possible creation of one or more property companies that could own and manage portfolios of public sector properties. These portfolios could be grouped by geographical location, asset class or department,” the statement reads.

City experts say any such listed entity would need a portfolio that could provide long-term income from assets such as prisons and government department headquarters.

Peter Cosmetatos, director of policy (finance) at the British Property Federation, explains: “Using a REIT as a dumping ground for non-performing, deeply ‘underwater’ assets would not work and would also devalue the overall brand of REITs.

“However, a REIT that would contain good government property let on a long-term basis to public sector occupiers would be very attractive.”

While some REITs have a market capitalisation of as low as £16m, the average REIT size in the UK is more than £1bn. To attain a steady income, any public sector REIT would need to be a similar size. However, to create investor confidence in such a company, the correct management would have to be in place.

A City source explains: “[The government] has £370bn of assets and there should be enough within that to create a significantly large-scale portfolio to yield a good return and appeal to investors. But ultimately you invest in the management of a company and those managing the assets would not instil confidence. You would need an external manager.”

Bringing in external management and creating a new “company” could bring legislative problems, because listing rules require the company to be in existence for three years before it can list.

REIT rules also dictate that no more than 10% of the company can be owned by a single investor, which means the government would need to relinquish 90% of the ownership of its assets.

Even if public sector REITs are created, there is no guarantee of investor appetite. Paul Pulze, analyst at Evolution Securities, believes returns from a government property REIT may not be attractive.

“Given the recovery in the market, real estate investors aim to move up the risk curve to get greater returns,” he says.

Public sector REITs could be an effective way for the government to maximise returns from its portfolio, but there will be several hoops to jump through to do so.

• Property “tsar” cool on public property REITs
• Government appoints £370bn property head
• Government starts hunt for property savings
• Heskett joins McCready at Property Unit
• McCready fleshes out £70bn property efficiencies