Royal Mail Property Deal Cost U.K. Taxpayer At Least £250M

The 2013 initial public offering of Royal Mail was hugely controversial, and London property was at the centre of it.

Sales of London property assets to residential developers by the now-privatised company are coming in far above the valuation put on them at the time of the flotation. Bisnow research reveals the U.K. taxpayers will lose out on at least £250M from the privatisation.

The sales will reignite the row over the privatisation and how the sale was handled.

"There are very serious questions to be answered over how people who are still in government have squandered potential revenue for the exchequer at the same time as imposing austerity and misery on my constituents and others around the country," said Labour M.P. and former shadow secretary of state for Business, Innovation and Skills Chuka Umunna. 

"I'm sure the new chair of the select committee, Rachel Reeves, will follow up on these revelations and hold the Department for Business, Energy and Industrial Strategy to account, for this whopping great failure."

The National Audit Office and a parliamentary inquiry have been highly critical about the way the privatisation was handled, with a particular focus on the London property assets.

Royal Mail can trace its roots back 500 years to Henry VIII. Its red vans and post boxes are part of the fabric of British life.

The coalition government decided to sell off the business through an IPO four years ago, in a sale that deeply divided the public. At the centre of this debate was the price at which the company was to be offered and the fine line that needed to be walked.

The highest price possible needed to be achieved, with a valuable and historic asset being sold and the proceeds going to the U.K. public purse. But the price couldn’t be set so high as to put off the buyers of shares in the company; if the IPO failed, the government might end up having to hold on to Royal Mail when it didn’t want to, or sell off a business tainted by failure at a discount. Lazard, UBS and Goldman Sachs were the investment banks that advised the government. 

A major part of the argument about what the company was worth was its London property portfolio. Royal Mail has amassed a huge number of properties across the country: shops, sorting offices and warehouses of various shapes and sizes.

But it also had three sites in Central London that it had deemed surplus to requirements — which were in prime areas for residential development — in Paddington, Nine Elms and Mount Pleasant in Farringdon.

These sites were the subject of a huge amount of argument and disinformation. Some critics of the privatisation put the value at as much as £1B, but they were talking about the potential end value of the sites if all the apartments for which there was planning consent were built out. Royal Mail was and is not a house builder, and it was never going to develop these sites itself.

The matter wasn’t helped by the fact that the prospectus for the IPO did not outline the value of the sites, leaving the question open to interpretation and speculation. 

On 11 October 2013, Royal Mail floated at a price of 330p a share, valuing the company at £3.3B. When trading in the shares opened, they skyrocketed, rising 38% on their first day, increasing the value of the company by £1.2B and fuelling criticism that the company had been sold off on the cheap.

A report by the National Audit Office later that year said the taxpayer was likely to have lost out on at least £750M of value. Business Secretary Vince Cable, who oversaw the sale, argued critics were judging with the benefit of hindsight.

The shares have since fallen in value, and the company is now valued at around £4B, still well above the IPO price. We are starting to get hard evidence that the U.K. taxpayer has missed out on a potential windfall from the sale of those three London development sites.

A document buried away in the appendices of a public enquiry into the privatisation of Royal Mail, and not previously reported, shows the value put on the sites by the government and its advisors.

Written a week after the IPO, a letter from Vince Cable to MP Adrian Bailey, the chairman of Business, Innovation and Skills Select Committee into the sale, outlines the valuation methodology applied to the sites.

“Taking into account the overall position of the surplus portfolio and the relative immaturity of these sites in terms of actual development, a combined value of £330M (as suggested in one of the equity research analyst reports) appears at the top end of any likely range,” he said.

The letter adds that JLL provided a valuation of the sites.

But we are now seeing hard evidence that this figure very much underestimated how much they would ultimately be sold for.

The first site, a one-acre plot in Paddington, was sold to a Singaporean company, Great Western Developments, in October 2014 for £111M. 

Then, all quiet until in June this year, when Royal Mail sold a part of the Nine Elms site to U.S. developer Greystar for £101M. The plots Greystar purchased accounted for 2.67 acres of the 8.35 acres of the site that are developable, or slightly more than 30%.

And, at the final site in Farringdon, U.K. housebuilder Taylor Wimpey is in advanced talks to buy the 6.4-acre site for slightly more than £200M. When that deal completes, Royal Mail will have recouped around £410M from sales related to the three sites, with two-thirds of the Nine Elms site still to be sold. 

If the remaining plots to be sold at Nine Elms achieve the same price per acre, the privatised Royal Mail will have received £610M for its three London development sites against a valuation of at most £330M, at the time of its privatisation.

Even if land values fall by 20% in the prime London residential market, it will have achieved around £250M more from the sales than was anticipated at the time of the IPO.

Comparisons of the amount of nurses that can be paid for with that kind of money, the metric usually used in these situations, are facile. But the U.K. government is still in a period of austerity, and every penny that can be put toward public services counts.

Those involved argue that best value was achieved.

“Investors were provided with sufficient disclosure to assess the potential value of Royal Mail’s property portfolio in the prospectus,” Royal Mail said in an emailed statement. "We highlighted the main London sites for disposal and the acreage."

UBS and Vince Cable declined to comment, and Lazard and Goldman Sachs did not return requests for comment.

“JLL provided Royal Mail with valuation advice in respect of four properties with potential for residential and office redevelopment,” JLL said. “Advice was provided in accordance with the RICS Valuation – Professional Standards and accepted market practice for the valuation of land with development potential and reflected market circumstances at the date of valuation.”

It is easy to argue, now sales are occurring, that Royal Mail’s London development assets were sold off too cheaply, and JLL is correct to point out that valuations cannot factor in potential future rises.

But many critics, among them MPs assesing the sale, argued that the properties should be spun out of Royal Mail and retained by the government, or some sort of claw back or overage mechanism put in place to recoup some of the upside if they were sold at big profits.

"At the time of the privatisation I remember being breezily dismissed about the concerns I raised," Umunna said. "How could they be £250M or more out on the valuation?"

Indeed, the privatised Royal Mail did exactly that when it sold the Paddington site, it put in place provisions so that if the new owner got a planning consent that allowed it to build more flats, it had to pay a further £20M; and if the site was sold within two years, Royal Mail was to receive 50% of any profits. 

The department that oversaw the sale, now renamed The Department for Business, Energy and Industrial Strategy, argued that this would not have been possible.

“Stripping out Royal Mail’s surplus property prior to the IPO would have had a detrimental impact on value for taxpayers and the sale," it responded in a statement. “Details of Royal Mail’s property portfolio were disclosed to investors and analysts which fed into their valuations and was the best way of ensuring that the value of the property was reflected in the share price at the time.”

It added: “Our financial advisers felt that the potential upside from the three major London sites, which were publicly disclosed as surplus, could be better reflected in the valuation of Royal Mail through the IPO process. Therefore, we made the decision to capture value from future property sales through disclosure in the prospectus and through analysts’ briefings.

“Removing the surplus property prior to the IPO would also have risked reopening the state aid approval as it would have reduced Royal Mail’s ability to make the required company contribution to its restructuring plans.”

Privatisations are always deeply emotive and controversial issues in the U.K., and the value that they achieve is particularly important when the pot of money available for the government to spend on services is shrinking.

No one can predict the future of property prices, especially in a market as volatile as London. But the warnings that Royal Mail, and its London property in particular, were being sold off on the cheap are now ringing true.