Can Great British Railways unlock the potential for railway property to bring benefits to passengers, places and the railway workforce?

An insightful BusinessLDN Roundtable with Stephen Morgan MP, Shadow Minister, hosted by First Group gave business leaders the opportunity to react to the Opposition’s Great British Railways policy.

Its centrepiece is the creation of Great British Railways as an arms-length body, unifying infrastructure and trains.

The policy document ‘Getting Britain Moving: Labour’s plan to fix Britain’s railways’ picks up on the importance of land and property. It refers to:

• Improving neglected stations
• Surplus railway land that could be redeveloped with private finance; and
• Integrating new housing into transport projects.

However, it underplays the significant potential that exists for sweating railway property to benefit passengers, places and the Exchequer.? It is also silent on the urgent need to provide safe workplaces that support the stretched workforce who keep the railway safe and running.

Having had the privilege of providing strategic real estate advice to the rail infrastructure sector (including on a wide-ranging policy review of railway stations and property) I believe policymakers, civil servants and railway management should focus more on releasing value from railway property. ?

Property provides the vital interface between the passenger and train, as well as the facilities for the workforce to operate and maintain the infrastructure network.? Its potential to generate revenue and provide capital can contribute to solving the railway’s post-pandemic financial shortfall. Railway land, particularly around stations, can be used to provide housing and employment.?

First, a few key points from the Roundtable, followed by a discussion on the property opportunities:

Key points from the Roundtable with Stephen Morgan MP

• Great British Railways will work in shadow form prior to the Act, enabling franchise contracts that expire to be brought “in-house”
• Beyond freight, the role of the private sector needs to be clarified.? The Shadow Minister expressed an appetite when questioned for public private partnership; the policy document is encouraging of open access routes (run without subsidies)
• Working closely with mayors and regions is a policy intention; including with Andy Burnham and Richard Parker to consider proposals for a lower cost connection (than the axed HS2 route) from Staffordshire to Manchester Airport.?
• There is a possibility that station management could be devolved to mayors and regions (the majority are currently managed by TOCS)
• Business leaders welcomed proposals for a long-term stable investment strategy that would help industry plan, as well as bring employment and efficiency benefits e.g. through train manufacturing and construction contractors
• Concern was expressed over the unresolved future of Euston, including missing the opportunity to finance a science technology superhub.

In fixing Britain’s railways more attention should be paid to harnessing the potential of railway property, including:

• Exploiting the commercial property portfolio
• Delivering more major station regeneration schemes that create places, housing, employment and income streams
• Fixing the commonly dilapidated operational property portfolio that accommodates railway signallers, controllers and frontline workers who maintain the track and respond to incidents.

?Commercial Property

At privatisation, only property that supported railway operations was supposed to be transferred to the infrastructure business. However, since privatisation pressure from HMT, DfT, the regulator and a number of strategic reviews has led to billions of pounds of asset sales (the largest being the ￡1.4bn disposal of the arches portfolio in 2019).?

Nevertheless, the railway property portfolio continues to be of a comparable scale to some of the largest private sector real estate funds in the UK. The overall estate is polarised. ?The property rental portfolio (excluding retail in stations) is low value and highly intensive to manage. Even with the sale of the arches portfolio in 2018, the property rental portfolio it is extensive, covering a broad range of sub-classes including industrial, office, land and retail property; other income comes from car parks, telecoms, and easements. ??

On the other hand, the Managed Stations retail portfolio is prime space, with high capital values and a relatively low level of management intensity. It generates the majority of property income from a mix of retail, advertising, concessions and other units such as serviced offices.? It has the potential to raise billions of pounds of proceeds.

?There are also purportedly tens of thousands of hectares of unused railway land.? Much of this runs alongside the tracks and has no development value.?In addition, there are thousands of hectares of freight land, not all of which will be required to grow rail freight and reduce road congestion.

Unlike commercial real estate funds, the railway portfolio did not arise by design or strategy, but through the evolution of the railway, with its operational requirements the priority. This has created a sporadic geography and range of asset classes; often in areas where there is little tenant demand. Overall, the portfolio is distinctive, dispersed and, in aggregate, valuable.?

The sale of the arches portfolio dismantled the argument that commercial property portfolio should remain under Network Rail ownership and control in order to ensure the safe operation and sustainable management of the railway.? Moreover, government policy on the efficient use of money and assets (Managing Public Money) broadly requires that commercial activity remains ancillary to the public service.? This points towards further divestment. ?

Whatever the future arrangements for managing track and train, measures need to be taken to ensure that this extensive portfolio is reviewed and new models for maximising value, including private sector partnerships, are explored.?

This includes consideration of a new ownership and governance model, because:

• Property is non-core business.? There is a weaker incentive to maximise the financial performance of property than a company with private equity
• The freedoms and flexibilities to conduct property management activities, secure development finance or dispose of land are fettered with regulatory hurdles that commercial property companies do not face ??
• The Single Till and existing governance structure means there are relatively weak incentives to respond fully to favourable market conditions
• There are constraints on reinvesting property income into capital and revenue growth opportunities.

Government, opposition parties and policymakers should note the case for change and consider the options, including either:

• Commercialising property management within the continued control of the railway (e.g. the GBR entity)
• Creating a new arms-length body for property with third party involvement (an independent guiding mind for property backed by risk capital)
• Divestment of all non-operational interests.

The prize is likely to be secured through a combination of third-party service providers, development partnerships, sales of concessions and direct asset sales.

Major Station Schemes - JVs

Possibly the most significant benefits from railway land and property can be derived from a more dynamic partnering approach to major station redevelopment.? Schemes such as Paddington, Kings Cross and York Central can transform and even create new places and communities, support economic growth, provide homes and improve the passenger experience. ?

Historically Network Rail has been perceived as having strengths in delivering small to medium sized schemes in a ‘rail’ environment.? However, it has not generally operated outside the ‘red line’ of the station and has been reluctant or constrained to take development risk.? It has not had the internal capacity and capabilities to conceive, instigate early concept design and lead the planning and delivery of large complex schemes.

There are multiple opportunities nationally for major redevelopment of stations, extending outside the ‘red line’, as well as over-site or over railway development.

Investment is needed in capacity and capability building to enable the railway to enter into more JVs with development partners on specific schemes.? JVs with the private sector provide access to development expertise, finance and risk sharing.? The railway property team needs to focus on managing the rail interface (with routes and asset protection) and obtaining the regulatory agreements.? Capabilities are also needed in commercial and procurement, while experienced senior managers are required to site on JV Boards.

?Workforce operational property

Operational accommodation provides the essential built environment and support infrastructure for the maintenance engineers, controllers, signallers and renewals teams that keep the railway operating.

There are fundamental shortcomings in the current accommodation, which comprises a mix of modular construction, dilapidated portacabins in railway yards, and space at Victorian railway station. Due to a chronic historic underinvestment, staff and critical operations are accommodated in buildings that are often not fit for purpose, in poor condition and in legacy locations that are ill-suited to operating the modern railway.? ?The lack of single sex showering, changing, toilet and welfare facilities is a significant obstacle to diversity aspirations in the frontline workforce.

The operational portfolio urgently requires investment and reconfiguring to:

• Respond to changes in business requirements as a result of line electrification, modernising signalling and maintenance, the Digital Railway, and remote monitoring
• Keep the workforce safe, well and productive and to improve diversity
• Reduce whole life costs and meet statutory compliance
• Deliver net zero targets.

This can be achieved by investing in more integrated maintenance depots and control/ signalling centres, rationalising the number of sites and disposing of expensive unsuitable sites.

Modernisation can be funded through operating cost savings from a smaller footprint, asset sales and development agreements, and the avoidance of a heavy bill for remediating facilities in a poor condition.

Conclusion

Labour’s policy document only touches upon the significant opportunity for sweating railway property to benefit passengers, places and the Exchequer.? Policy-makers need to pay more attention to improving the contribution that stations and property make to passenger experience, a safe, productive and diverse railway workforce, local communities and the economy.

Whatever the ultimate shape of GBR, it will need to take action to ensure that operational accommodation is better able to serve the needs of operating a modern railway and that staff working conditions are improved.

The private sector has a significant role to play in providing the finance, commercial management and development expertise to make these assets more productive, resulting in a better railway, more housing, new income streams and economic growth.