The next couple of years could potentially see a revolution in how the government manages its massive – and massively diverse – property portfolio.
The construction industry will be closely watching pilot property vehicles being set up to manage public sector buildings more efficiently. With annual savings of £5 billion being talked about, some significant deals are certain to emerge.
In his March 2010 budget, former Chancellor Alistair Darling said strategic property vehicles would be set up by April 2011 and the coalition confirmed in October’s spending review that they would be piloted in London and Bristol in 2011/12.
The Government Property Unit is in the process of appointing property and financial advisers.
The overall aim is clear – to save money by accommodating more staff in fewer buildings geared to a flexible workforce, with larger-scale FM contracts and a managed exit from leased properties that are no longer needed.
Observers expect some elaboration from the GPU on how the vehicles will work by April.
But getting agreement between departments, who have all run their own estates for many years, may be tricky and the timetable is likely to slip.
A Cabinet Office spokesman said the vehicles will “initially focus on the central civil office estate, which are mainly offices”.
This includes government offices, central departments, NDPBs, agencies, the Foreign and Commonwealth Office estate, the English Heritage administrative estate, the defence administrative estate, courts and laboratories. It does not include GP surgeries, fire stations, police stations or local government.
Swathes of government property are already owned by Telereal Trillium and Mapeley under sale and leaseback arrangements, and these companies will inevitably be part of any property vehicle discussions.
Beyond Telereal Trillium and Mapeley, the main opportunities are for companies with big FM outsourcing capacity, such as Sodexo and Carillion.
Variety of openings
There will be many different sorts of opportunities for cost consultancies, contractors and subcontractors – from relatively straightforward refurb projects, through some new-build and up to complex contracts to take on the management of built assets, even entire department portfolios.
Capita Symonds chief executive Jonathan Goring says the involvement of industry in re-engineering the public sector property portfolio has two main dimensions – the question of who owns and operates the asset, and of who manages the revenue derived from it.
He says it is wrong to think of ‘outsourcing’ as about large-scale sell-offs to property: “The government’s credit rating gives it great advantages in borrowing, and this is a terrible time to sell property. I don’t think this is about disposal.”
Instead, Mr Goring believes it is about giving government more bang per square foot, both in terms of its own productivity and maximising the revenue it gets from others. And a lot of that is about information – see page 19.
KPMG’s head of real estate consulting Mike Atherton says: “There’s a lot of focus on short-term budgetary pressures.
“You can’t foresee a major refurbishment project in the very short term but that’s not to say that beyond those early projects there won’t be something very substantial.”
Turner and Townsend head of government David Mathieson adds: “We’re not talking about wholesale mass investment in refurbishing buildings. A significant number have been refurbished recently.”
But he suggests refurbishment deals could arise as properties recently vacated by the government go back on the market.
“Landlords are going to have quite a lot of space currently let to government coming free, and in London there’s still a demand base for that,” says Mr Mathieson.
“Those buildings will need a degree of investment to become lettable again.”
The government will also be seeking to vacate adjacent properties at the same time to create bigger development opportunities, according to EC Harris partner Simon Rawlinson.
Another possibility is for the government to hold on to its properties, but appoint partners to manage and develop them.
Croydon Council has kept ownership of its land but appointed John Laing as developer. An estate management deal along these lines could be attractive to state partners.
However, DEGW’s director and head of public sector Paul Wheeler sounds a note of caution: “Finding private sector occupiers for central government space works quite well for Whitehall, but whether it will work in Bristol let alone parts of the North-east or North-west is a very difficult question.”
A big opportunity, according to Mr Mathieson, is carbon reduction: “Every central government organisation has to cut energy consumption by 10 per cent by 2020. How we cut carbon emissions from buildings is a key issue,” he says.
The Labour Party’s plans to relocate civil servants from the capital to different regions have been dismissed by the coalition as expensive and unpopular.
However, proposals for relocation within the South-east have not been dismissed. Stratford and Croydon have been floated as sites for functions that do not need to be so close to parliament.
This could present new-build opportunities. Richard Grass, head of public sector at Colliers, which was in the first round of bidding for the pilots, says: “If moving civil servants is to be done in large numbers it would involve new construction, because there’s nothing there in Stratford and office stock in Croydon is all about 40 years old and unsuitable.”
The Croydon development is worth £450 million, but involves demolition and new build and was agreed before the property crash.
The 2009 review by Lord Carter projected efficiencies of £1.5bn a year by 2014, rising to £5bn a year by 2019, and Construction Product Association economics director Noble Francis says: “Looking at the size of the savings these are obviously significant large contracts.”
Getting in line
How should suppliers position themselves to get this work? Mr Wheeler part of Davis Langdon, says: “The best way for the conventional construction industry and contracting business to make money out of this is to be partnering with other suppliers who are in the FM market to provide a package of total solutions.”
Contractors need to think outside the box on finance. “Where innovation from contractors comes in is better whole-life investment in the sustainability agenda and potentially better risk-reward arrangements,” says Mr Mathieson.
“In the marketplace, the contractor still delivers buildings and walks away, but in the mid-term that might start to shift.”
Fast payback will be essential in the current climate, with timescales of three to four years rather than six or seven.
Mr Rawlinson talks about “absolute value for money”. He says: “The public has to have confidence the government is spending its money where it matters.
“The worst thing would be rows about too much money spent on chairs or plants.
“People need to focus very rigorously on the personal productivity of the workforce, the absolute efficiency of the space and FM and business support functions.”
Be prepared to work for competitive fees and capital costs – perhaps in light of the fact that a government client cannot fail so there is added security.
Benefit-sharing models may also help firms to be a step ahead. “If you’re confident you can demonstrate you can add value or take costs out of the deal, you could say we charge less but we take some of the benefit,” suggests Mr Rawlinson.
Ultimately, suppliers will need to be influencers and advocates for the government’s objectives. Mr Wheeler says: “The government is looking for a more sophisticated understanding. In the past, suppliers have not been incentivised to help government occupy space efficiently.
“Now government will want a partner who will engage directly, negotiate and persuade departments to occupy their space more efficiently. We’re moving from a situation where the supply market has to understand assets to where it has to understand organisations.”
Mr Goring says: “Contractors can’t simply wait for the government to give them work; they have to reach for it and help create opportunities in this area.
He says the big challenge will be taking a more long-term view of their involvement with property assets, and being prepared to take risks.
“The big family firms can afford to wait it out, but the publicly owned ones don’t have that choice and the ones that aren’t able to change quickly will have problems over the next 18 months.
“You saw it with Building Schools for the Future – the smart contractors tried to understand social and government need, and knew it wasn’t just about knowing how to build a school,” he says.
Additional reporting by Nick Edwards