Rail industry is sitting on surplus assets

Posted: 19/06/2006

There is a potentially large and valuable portfolio of real estate property which rail users are currently sitting on, the value of which perhaps they fail to fully appreciate. At present, the rail industry is going through a series of changes with manufacturing now at extremely limited level, while changes following the reorganisation of the rail industry have resulted in both the opening and closure of maintenance depots.

All of these events have resulted in the potential for income generation from surplus accommodation. Firms such as Cyril Leonard are helping to identify opportunities to develop value from these assets and to negotiate settlements to minimise potential costs.

As Alan Thomas, an Associate Partner at Cyril Leonard explains, 'the UK real estate industry has developed over a considerable period of time and is now subject to extensive legislation and case law, which can prove to be a minefield for those not fully conversant with potential pitfalls'.

'Property case law is littered with examples of problems which have trapped the unwary' Alan Thomas says. 'For example a short term temporary arrangement regarding surplus accommodation can escalate into a permanent sub-letting, with tenants subsequently proving impossible to dislodge. Such an unplanned and undesired result can be both costly and time consuming to change and could have serious complications if the space was required urgently for another project'.

The acquisition of property may initially appear to be a simple exercise, but without careful thought and due consideration, there is a possibility of the purchaser becoming subsequently liable for costs and responsibilities far in excess of what was originally anticipated, with potential obligations for substantial additional repairs, dilapidation liability and so on.

However opportunities for profit are plentiful, if assets are handled property. 'The rail industry is currently in a dynamic state,' Thomas says. 'With the contraction and expansion of requirements for specific operations, throughout the country, there are opportunities for income generation from surplus real estate assets.'

For example, transport giant Alstom has decided that the Washwood Heath site - on which Virgin Train Pendolinos were originally constructed - is now surplus to their longer term requirements. Cyril Leonard have carried out an extensive marketing exercise, with a view to re-letting the surplus accommodation. The campaign has achieved its goal; the estate was re-branded Heartlands Park, with substantial interest arising from the process.

Thomas says: 'The benefits of rail access to this site have become immediately apparent. Demand has been considerable, and substantial portions of the estate have already been leased to local industrial and distributor companies.'

Such sub-lettings have generated over £1m of rental income per annum, and only a collection of small, elderly sheds now remain available. With an eye to future redevelopment, and to give the clients flexibility in the future, it was decided that the Washwood Heath premises should be let on a short-term basis - facilitating future fluctuations in demand and requirements.

The success of this project is soon set to be replicated; the Alstom facilities at Preston are now considered too large for future use, and following an extensive appraisal, it was decided that around 200,000 sq ft were surplus to requirements. Again, Cyril Leonard have led a marketing exercise, and the campaign has once more demonstrate the interest which can be generated from surplus rail property. All of the Preston accommodation has now been fully sub-let, producing a positive income stream.

In addition, Cyril Leonard are advising West Coast Train Care in respect on the renewal of their lease of depots at Willesden and Liverpool. Lease renewal negotiations can be particularly complicated, due to the various Landlord and Tenant Acts which determine how values could be determined. Considerable technical expertise is necessary in order to achieve the optimal solution. Carillion Rail and GB Railways are also both clients of Cyril Leonard and have been provided with advice over a period of years.

As Alan Thomas says 'it can sometimes be forgotten that there are always property issues to be considered with engineering remedial works, of which there are an increasing number of contracts at the moment. Specialist engineering firms do not always have the necessary expertise in real estate matters and it can be too easy simply to ignore both the potential values and problems inherent associated with complex property law.'

Cyril Leonard have joined forces with well known engineering practice High Point Rendell in order to provide real estate support for their Transport for London project bids.

According to Thomas, a specialised surveying firm should always be considered when rail firms are seeking advice for the acquisition of additional accommodation. 'Specialist surveyors are in a position to be able to advise on appropriate lease terms, including length of lease, rent, and repairing obligations. And, drawing upon their sometimes closed market of property professionals, surveyors can provide details of potential properties which are not commonly known to be available.'