Gerry Hughes, executive director and head of consultancy & delivery at GVA Grimley, gives his view on the limitations of local authority asset sales and why sale-and-leaseback deals could be the answer for the public sector:

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The Total Place initiative put forward by the previous Labour government is emerging as a new strategy likely to influence future local authority asset management strategy.

Following the results of a recent pilot, a March 2010 HM Treasury report estimated that, at the national level, Total Place could generate up to £35bn of gross capital receipts over the next 10 years from the sale of surplus assets to support targets under the Treasury’s money-saving scheme the Operational Efficiency Programme.

Further work is currently underway to establish the viability of the initiative at a number of local authorities.

Running in parallel with the recommendations of the OEP, the 2009 Budget detailed plans for the sale of £16bn of assets over the period 2011-2014. Local authorities are expected to find £11bn of this total. The plans have been carried forward by the new coalition government, but are likely to change following the comprehensive spending review, with higher levels of disposals required reflecting the more severe spending cuts. Initial reports have indicated the total figure may be increased to £25bn.

With further pressure to improve efficiency, plus the spending cuts, local authorities will be forced to consider staff redundancies, further outsourcing, sharing of facilities between authorities, cutting services where possible, hot-desking and home working.

This will mean a large reduction in the space they occupy and using what is left more efficiently. Large scale disposals of older, smaller, less efficient buildings and investing in new or refurbished buildings with larger (more flexible) floorplates is likely.

Establishing the business case for such ‘invest to save’ initiatives will be difficult where disposal values are low. But the scope to reduce property running costs is significant, especially where high maintenance backlogs exist. In addition, increasing energy and carbon costs will also play a part in decision making.

A major difficulty with government plans for property disposals is that the recent property downturn will make local authorities reluctant to sell at what is considered to be close to the bottom of the market, particularly for the more secondary property that local authorities would want to dispose of.  For this type of property private sector demand is weak due to the risks of low occupier demand and rental growth, high vacancies, short leases and the high capital cost of obsolescence and sustainability.

Conversely, rather then selling off buildings or sites in a weak market, many local authorities may be more likely to consider acquiring property sites and redeveloping or refurbishing existing buildings. This would allow them to take advantage of lower prices and low interest rates, to achieve longer term floorspace efficiency aims, so saving on future rental payments.

In addition, some local authorities argue that freehold ownership gives them greater control over the use of buildings they occupy.

A contrary view, however, is that having to pay rent concentrates the mind and provides a constant pressure to use space efficiently. There is an opportunity for local authorities to sell assets they own and occupy, and lease them back, as a way of realising capital receipts. This approach has its attractions and newer, well located property, subject to a long lease back to a local authority, would be attractive to investors and high prices would be payable in the current market.

In summary, under the previous government’s plans local authorities were not likely to increase disposals significantly above current trend levels. But with deep cuts to government spending imminent, the need to cut staff and hence the space they occupy and to make ever more efficient use of public sector property is becoming a priority.

A renewed drive to improve property asset management will result in a significant increase in disposals over the medium term, but the types and locations of sites that become available will not appeal to private sector investors and increased supply relative to weak demand will push asset prices even lower.

Consequently, we expect to see an increase in sale-and-leaseback transactions and other joint venture agreements with the private sector. We also expect to see an increase in multi-asset development joint ventures with delayed land/asset disposals as the public sector seeks to make its assets work harder and benefit in the development profit.

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