The land that timetables forgot

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Developers fear that Railtrack's £450m-plus losses could shunt its 15m sq ft redevelopment programme into the sidings for good. With the company's boarddistracted, some of Railtrack's best assets – such as Birmingham New Street station, above – are stagnating.

He's always been there, in engineering or signalling, waiting to pounce, to prevent development worth hundreds of millions of pounds from going ahead.

Lurking around stations in his sandals, his tie hanging loosely beneath a trademark V-neck sweater, he's used bureaucracy, budgets and now safety as an excuse to block the efforts of those trying to regenerate Britain's key railway stations.

The Railtrack Project Prevention Officer should be an anachronism. But they say that at Railtrack, the feared creature, descended from the dreary form-fillers who staffed the British Rail Property Board of the 1970s, has regained the upper hand. And he is preventing a company that was yesterday expected to reveal £450m-plus losses from reaping the rewards of the current development cycle.

The evidence is plain to see. Redevelopments of Birmingham New Street (above), Paddington, Euston, London Bridge and Edinburgh's Waverley are all moving slowly and Railtrack's 1.4m sq m (15m sq ft) planned programme seems to have hit the buffers. Safety is obviously Railtrack's priority at the moment. But after the Paddington, Hatfield and Selby disasters, has the company's corporate nightmare compromised its ability to also function as a property company?

Has it knocked confidence so badly across the group that an air of caution has taken over?

Property Week has investigated Railtrack's recent development track record and uncovered a story of a company buckling under the conflicting demands of safety, the Rail Regulator and red tape. A company that – helpful press office aside – seems to shroud its property business in secrecy to stop the regulator getting his hands on more of its assets.

Property deprioritised
Developers eyeing its prime sites say property's lowly position on Railtrack's agenda has had dire consequences for its development programme. While Railtrack Property has succeeded in developing, letting and selling schemes in places like Norwich and tying up joint ventures, such as one in Aberdeen, it is the big redevelopments that get noticed (see factfile) – and, say the critics, there's not much happening.

As one analyst puts it: '[Railtrack] Property is bound to not be getting the attention it deserves. The whole core business is nothing short of a disaster.' Another adds: 'Just getting the whole of Railtrack to talk to each other from top to bottom is a priority. Morale is rock bottom.'

There is sympathy for the company's plight. 'Given the way the Railtrack management is stretched at the moment,' says another, 'I don't think there is any point doing anything about property. They'd just get in more of a mess.'

Railtrack Property cancelled its cocktail party earlier this year in the week of the Selby crash. But although the champagne flowed for several hundred guests at the rescheduled event a fortnight ago no other development group would have to cope with these necessary, but unwelcome interventions.

But there is also a feeling that Railtrack has not made life any easier for itself. Developers blame internal procedures – which they believe to have been instigated by a report from superconsultant McKinsey – for slowing down Railtrack Property development projects.

Convoluted systems – such as having to get formal spending approval for every individual architectural or engineering commission, rather than being allocated an annual budget – are also said to hinder Railtrack Property director John O'Brien and his 400-strong team.

While junior staff are encouraged to reject a closed civil-service culture by showing initiative, insiders say managers are severely constricted by a form-filling and mistrustful culture that forces them to account for their every move, right down to who has entertained them.

Not only is there too much paperwork, say critics, there are too many people. With little movement on the big station projects, the exact purpose of this large, seemingly inert workforce will continue to provoke questions.

There is also a feeling that money poured into the non-event that was the Millennium Bug could have been spent on improving computers.

Smoke and mirrors
Not surprisingly, the board of Railtrack sees its priorities as managing and enhancing the existing track and creating special purpose vehicles for long-term expansion. Property comes further down. But the rumour is that the main board struggles to recall how much Railtrack Property contributes each year.

It is not the only one. Although the figures are freely available in its annual report, there is an air of secrecy about detail at Railtrack Property, with insiders saying the 'P' word is the great unspoken taboo in dealings with the regulator and Whitehall. For a long time – until Railtrack's shares collapsed after recent disasters – there was a suspicion that the taxpayer missed out in its privatisation, partly because of the value of the landbank.

To this day, the company will not give a valuation of its property, and O'Brien just steers you towards analysts' notes. Even its own broker, Merrill Lynch's Clive Anderson, says he does not know what Railtrack's property is worth and that it is the big issue.

[Railtrack] Property is bound to not be getting the attention it deserves. The whole core business is nothing short of a disaster

City Analyst

As one rival developer comments: 'Everything is a little covert, as if they are all worried that if it got out that Railtrack was making a lot of money out of property they'd be shot.'

Sell-off solution
The glib solution many proffer is that Railtrack should spin off its property arm as a separate company. Why not raise cash through a flotation or the sale of a large stake in the £2bn-£3bn worth of property interests? Former Railtrack chief executive Gerald Corbett is said to have been keen on this idea, and is now pursuing a £600m sale-and-leaseback at Woolworth's.

However, others argue that the nature of the company's sites and the stifling regulatory conditions are likely to render this solution unworkable. Neither would it be allowed under a Labour government, they add.

The Office of the Rail Regulator refuses to express a view on this scenario, but one independent analyst comments: 'Railtrack's core business and its property are far more linked than BT's [which plans to raise £2bn through a sale-and-leaseback]. Chopping out the property would be very difficult and very expensive.' At least in the so-called golden days of the BR Property Board, it had only the Treasury to satisfy when it wanted to press on with a redevelopment like Liverpool Street in the 1980s.

What remote chance there was of separating the property interests from its core business is about to recede further. The regulator is close to acquiring the power of veto over any land sale 'likely to raise public issues', like parking or freight-related development – and this tinkering holds serious implications for Railtrack Property's economic existence.

Unlike, say, Land Securities or Hammerson, Railtrack receives a subsidy based on how much cash it raises in rental income and disposals. If it fails to raise £227m in 2001/02, Railtrack cannot make the money up from an increased subsidy.

However, if it raises more than this, and more than £1.16bn up to 2005/06, it has to give 25% of the extra cash to the passenger franchise operators. It's a bit like British Land having a good year and being made to share the proceeds with its tenants.

And it is on this point and others that Railtrack Property stands up to have its say.

O'Brien disagrees with the regulator receiving the veto, but is going along with it anyway by trying to negotiate the best terms.

'It's untenable,' he argues. 'The regulator wants £1bn of income but he doesn't want us to sell anything.' But he says Railtrack will go along with the veto, subject to reaching agreement with the regulator on detailed procedure.

While some speculate that losing half a billion pounds and going to the government with a begging bowl for £1.5bn more can't be helpful to the property arm, O'Brien is defiant. He says: 'If it got to the stage where I was short of money, yes, I would want to keep the proceeds of our sales to reinvest in the property business.

But the funding side I've never been concerned about. Our sites are so good we can always get funding for them.'

If Railtrack Property was sold off, big new schemes would not only need the say-so of Railtrack and the train operators, but also the planners and heritage groups that swarm around station developments. It would be a logistical nightmare.

O'Brien says: 'There is no point in just giving the whole programme away to everyone else. What do we do? Sell Euston? Then what?

'Property is such an integral part of the whole Railtrack business, I find it hard to believe that a regulator who is struggling to allow us to sell off strips of land would allow us to sell the whole portfolio. We are not considering disposing of any of these operations.'

As an example of how closely the property arm and the railway work together, the only night of the year Railtrack Property could install steelwork over tracks at Broadgate was when the clocks went back – giving an extra hour – to prevent track closures.

Disputes like this may also prevent a sell-off of Railtrack's development arm, which sits outside the regulatory framework. The idea is that Railtrack would retain a large stake of the arm and cash in, while another developer – one that is less distracted by its public image and customer safety obligations – carries out the huge works programme.

The regulator wants £1bn of income, but he doesn’t want us to sell anything

John o’Brien, Railtrack property director

For Railtrack Property's director of development Helen Gordon, this would not be feasible. 'We can deliver far more by using lots of development companies as partners than just one,' she argues. 'And why should any of them be better at working with the railway than us? We get people coming in and saying, "We want to put a raft over that," and they are shocked when we say, "How are you going to get the 7.55 in while you do it?"'

Deal-maker's defence
At yesterday's results presentation O'Brien's team was expected to give a solid account of itself amid the overall corporate disaster story.

And despite the mayhem, O'Brien says he does not feel neglected: 'There is a sub-committee of the main board which looks at property, and I've never felt I haven't had the support I needed.

'Even since Hatfield we have concluded a series of deals. We have done everything we wanted to.'

And he is adamant that Railtrack's current culture of caution is not affecting Railtrack's property business.

He says: 'Railtrack as a group has been severely affected, but there's a great feeling around Railtrack Property. It's completely different from the rest of Railtrack, which is now cautious and safety-first. We are the deal-makers and the go-getters.'

In yesterday's announcement analysts were expecting flat rental income for the year of £155m and a dip in profits from sales to £25m from last year's £56m, which was flattered by one exceptional gain.

Other money flowed on top of this to allow Railtrack Property to hit the baseline income it was expected to contribute to keep the regulator happy – no mean feat in itself – and several other achievements were expected to be flagged up.

Joint ventures with Safestore and Marconi, as well as the rapid achievement of planning permission for its huge London Bridge scheme, contributed to what O'Brien calls an 'explosion of activity' at Railtrack Property.

Commercial values
He continues: 'People say, "They're not doing anything", but we don't have the luxury of not doing anything, because the network is growing so fast. We are ideally placed to provide the development to match that growth of the network.'

And yet … Property Week spoke to nearly 20 senior people inside and outside Railtrack Property who believe the operation does need a boost. A flotation is out, so simpler alternatives are needed to give property the status within the group it deserves. O'Brien could be installed on the main board, for a start.

Just as Railtrack Property renegotiated its track-charging regime to give it an incentive to improve rather than just sweat assets, it should continue to press hard for an end to the arrangement whereby it gives 25% of extra income to train operators.

No property company can prosper when everything extra it achieves is snatched away.

Hands-off role
Most of all, developers want Railtrack Property to radically alter its approach to projects, which could see it take a more hands-off role altogether. Many of its staff are involved in purely managing property, and project surveyors in the development arm often have eight to 10 projects to promote at once.

Following the McKinsey report, these surveyors have had to appoint consultants, who then win planning permission, and only then in most cases does Railtrack attempt to find a developer partner. Developers believe that this system is at the heart of Railtrack Property's perceived slowdown and that the company should instead engage them at the very start of the process to drive projects forward.

They want the company to ask them to pay for options to redevelop sites up front – say, £5m for an exclusive option on a major station for seven years – and then leave it to them to force a project on to site. The Railtrack surveyor could then attend a project management meeting once a month to see how the highly incentivised partner is getting on.

Railtrack Property undoubtedly has real expertise, but appears over-extended and taken for granted above. It may also be underestimating the capabilities of the development world and the creeping influence of its project prevention officers at a time when confidence throughout Railtrack has taken a knock.

Slowing down or gathering pace?

Railtrack’s major station schemes Critics say Railtrack’s relationship with Westminster council should not have deteriorated to the extent that its plans for a tower at Paddington have hit trouble. That at London Bridge, while it is laudable to have won planning permission for a huge scheme quickly, the scheme might be too expensive to stack up. That at Euston it should have tied up a joint venture with long-leaseholder Hammerson by now and that there are concerns about freight storage at its 750,000 sq m (8m sq ft) joint venture with Pillar Property at Cricklewood. It goes on. A Birmingham City Council source is aggravated about New Street, saying: ‘If we are going to have an international station here, and if we are going to get the best calibre of people coming to work in Birmingham we need something much better than we’ve got. ‘We don’t want young people working at Brindleyplace to have to tell mummy and daddy they have to come to shitty New Street on a shitty train. It’s our achilles heel.’

Railtrack replies
The highly regarded Helen Gordon, formerly of Laing Property, concedes that the pace of major station development could be quicker. She says: ‘I’m never going to be content unless we are getting through the schemes. I’m not going to be complacent about them. ‘The period between identifying tenant need to completing a building is too long for everyone in the property industry, so we are placing great emphasis on dealing with tenants early. ‘Added to that, building in the environment we do we can’t just push on as easily as people think,’ she says. On London Bridge, she is confident of its viability and says the 81,755 sq m (880,000 sq ft) scheme can only go ahead when the delayed Thameslink 2000 rail project starts. At Euston it has held talks with Hammerson, but a redevelopment is not necessarily viable because it may not be possible to get permission to replace existing towers now in existing St Paul’s sightlines. A 93,000 sq m (1m sq ft), mixed-use, Broadgate-style scheme with early designs by architect RMJM is now being examined over tracks at Euston instead, and at Cricklewood a planning application will go in shortly. And as for New Street, Gordon says Railtrack Property has been awaiting the conclusions of a Strategic Rail Authority and Railtrack study into rail needs for the next 25 years, and that Virgin wanting to almost treble its use. Now that this has been completed it can look at possible development of the station.


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