Imagine you had a crystal ball 20 years ago, a few years before the 1997 general election.
The health service was hard-pressed and sales of surplus (and in some cases, core) estate were helping to keep things going.
It was the new normal; it seemed the health service would continue to shrink.
Yet what happened was a rapid expansion and revival of capital projects. With your crystal ball, you may have decided to hold onto surplus assets and maybe derive an income from them in the meantime.
And today? There is a haunting familiarity of the circumstances: economic austerity, a need to control the costs of health, reconfiguration of acute services, a looming general election and headlines such as “Nearly £2bn could be saved in NHS property sell-offs.”
Does the past counsel caution in disposing surplus assets? Health, like pensions, is not a ‘here today, gone tomorrow’ business. Maybe, like pension funds, long-term secure income from property could answer cash-flow needs.
Consider retaining surplus assets for income generation if a number of specific circumstances are evident, such as:
A proven, existing need in the current estate for substantial expansion or re-build and surplus land will provide an ideal location to allow this. (land bank)
Some part of your surplus estate that will be significantly higher value to the organisation in the next five years if you retain it. (ransom strip)
A capital receipt might be clawed back by a governing organisation.
You will receive a market rent from the tenant(s) – it is an added bonus, not the primary aim, if the tenant has a complementary function to your organisation.
The income generated will cover all the costs of becoming a landlord and produce a profit over the quantified risks, if they materialise.
Be cautious about retaining surplus assets if the following arguments are used; these often do not stand up to scrutiny or underestimate the risks:
We will get more if we improve it prior to disposal. Will you really? Do you have the money to do it now and do it well? How much of the income will be absorbed to cover the costs of improvement? This can include market assessments, planning permission, land remediation, capital works, marketing and design fees - can your organisation resource this and front the costs at-risk?
Retaining surplus assets offers future flexibility for when we need more space. Chances are, when the time comes, the surplus space you have retained with be in the wrong place, the wrong size or unsuitable in some other aspect. You will be back at square one with your operating capital tied up in surplus asset.
We will partner with a developer. Will this allow you access to the assets when you need them at some future point? Will the deal restrict future flexibility? Have you considered the downside of liabilities if income is not as high as expected? Make certain you understand the downside risks – in quantified detail – and have contingency plans in place.
Pension funds deliver secure income to their investors by employing and retaining the services of large numbers of investment experts. Can you expect to do that in the future, or should you stick to the business of health?
Karla Damba is an associate director at Sweett Group