BAA puts dampener on railway station sell-offs

POTENTIAL bidders have ruled themselves out of the running following the revelation at last week's Conservative party conference that British Rail's biggest stations are to join the railway network on the auction block.

Institutional investors such as Legal & General are 'not interested'; retail groups such as WH Smith 'would not want to get involved in non-retailing business'; property companies such as Chartwell Land 'have never even considered it'; and possible railway franchisees such as Sea Containers and Virgin 'would rather concentrate on the trains'.

Perhaps most damning of all was the airports group BAA ruling itself out after making a detailed study of the plan's potential. There are many similarities between owning and operating airports and rail stations, since their main attraction to investors would be the retailing potential.

BAA, which makes vast profits from the shops at its seven airport operations, would have brought considerable retailing expertise to exploiting the potential of large railway stations. It would also have understood how to juggle the complex safety and licensing arrangements. But a spokesperson said on Friday: 'We have already looked into this in some detail and are definitely not interested.'

The lack of enthusiasm was predictable. In its current state, the railway retailing network is hardly a juicy offering. BR's 500,000sq ft of retailing is spread over 2,000 units in 650 stations; the units are small, as are many of the tenants. The result is that the estate needs intensive management at relatively high cost.

Almost all the leases are short, for less than six months, and most of the rent is in the form of a share of the turnover generated by each store. This is not favoured by institutions, which like to have a guaranteed 'covenant' or 'promise' to pay the rent from a company with solid financial backing.

BR says many of its tenants are solid, like WH Smith and Boots, but many others are small businesses, as demonstrated in the high turnover of tenants. In all, BR's retailing estate currently generates a profit of around pounds 41m on sales of about pounds 500m. That is an unexciting yield of around 8 per cent.

BAA, on a very similar 500,000sq ft of space, generates around eight times as much profit, pounds 320m. Half of it comes from duty-free retailing, but this is not an option for stations.

An even bigger stumbling block, though, is the relatively short time that most passengers spend in a station. At around six minutes a potential buyer, rather than the two hours or so for the average air passenger, this low waiting time is the key reason BAA decided it could make more money from expanding its airport interests than buying into BR's 'retailing opportunities'.

Most property analysts agree that to justify the risks associated with such an investment, the stations would have to be sold off very cheaply. Yields of 12 per cent on the capital value might be needed - which would imply a value of only around pounds 320m for the entire network; barely the value of one big shopping centre.

Yet Railtrack, the body set up to acquire BR's operational assets in the run-up to selling off the network, is unconcerned by the initial lack of enthusiasm. 'It's early days yet,' says Bob Hill, Railtrack's property director designate - though he admits the announcement by Transport Secretary John MacGregor has yet to prompt a single inquiry.

It was Railtrack that Mr MacGregor revealed last week would be taking over BR's stations as well from next April. The idea, he said, was that the vast majority of BR's 2,500 stations would be operated by the franchisees acquiring the line in question.

But many of the biggest of the 250-odd stations, which would in any case have to offer facilities to franchisees running a number of different lines, would be candidates for sale to independent operators such as shopping centre developers, property companies and pension funds.

At least 13 of the largest stations - eight in London - would almost certainly be offered for sale on long leases of up to 125 years as 'conventional' retailing property investments. These are Glasgow Central, Edinburgh Waverley, Leeds, Manchester Piccadilly, Birmingham New Street, London Bridge, King's Cross, Liverpool Street, Paddington, Waterloo, Euston, London Victoria, and Charing Cross.

Mr Hill says that the operators 'would be like the owners of shopping centres, taking a long lease from Railtrack and then sub-letting to tenants like WH Smith'.

Fifteen major stations, the cream of the estate, account for more than half the total rental income generated by BR's retailing division. Such stations - often in the heart of towns - admittedly have considerable potential as locations. Yet one of the key factors making investors shy away from the prospect initially is the uncertainty attached to the non-retailing aspects.

The Government appears to envisage insisting that investors sign up to run the station concerned in its entirety, deriving their income from the retailing aspects but also from charging for everything from the lavatories to the ticketing and train operations. This is the equivalent of the landing fees charged by BAA to aircraft, proponents argue.

That is new and uncertain territory for many investors. 'The stations may be perceived as development opportunities, and so might attract entrepreneurs, but as existing income stream propositions, they will be difficult to sell to institutions or property companies,' said Richard Wright, a partner in Jones Lang Wootton, the surveyors.

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