Underneath the arches: inside Project Condor

Network Rail has launched the long-mooted sale of its commercial estate portfolio that is expected to attract attention from private equity and sovereign wealth funds. Code-named Project Condor, the process is expected to recoup more than £1bn for the publically owned infrastructure manager to allow it to reinvest into the railway system. It is currently spending £130m each week. Adviser Rothschild is due to start engaging prospective interested parties between now and the end of the year, with a full investment memorandum expected to be issued in January. A sale will most likely be completed by the summer. The vast majority of the 5,500-asset portfolio is located under railway arches. It has a vast range of occupiers including restaurants, bars, offices, retail, leisure operators, breweries, car washes, gyms and healthcare centres. The diversification of the cashflow from such a broad base of businesses is expected to be one of the attractions to potential purchasers as this can provide stability. For this reason it is not expected that the ultimate purchaser will look to break up the portfolio and having such a large number of different properties allows for the potential to move tenants around within the portfolio as they grow. Condor currently generates an income of close to £80m, meaning a sale at £1bn would reflect a yield of 8%. The portfolio comes as a platform with an 80-strong management team. Spread across England and Wales, around 80% of the portfolio’s value is located in London, with much of the remainder located in Manchester and Birmingham. Just over 1,000 of the properties are vacant, with some being in marginal or difficult locations, while others are expected to be easier to lease once the new owner injects cap-ex. Average rents across the portfolio stand at around £8 to £9 per sq ft. Trying to shift this relatively modest figure upwards will be a likely ambition of any ultimate purchaser. Such an ambition may have to be undertaken carefully, however, with Network Rail having met stern resistance from small business owners, notably in locations such as Hackney, E1, and Brixton, SW9.    Condor is a rare opportunity for private equity firms to deploy such a large amount of capital into an value-add/opportunistic portfolio in the UK given the non-performing loan portfolio market has dried up. Due to the dominance of London assets it is thought that the portfolio may attract some sovereign funds, many of which require returns from real estate closer to value-add than core. It is expected that given the granular nature of the portfolio that many bidders will likely team up with asset managers. By its very nature, much of the portfolio is located near transport hubs. Railway arches have become an increasingly fashionable location for restaurant and leisure operators and it is hoped that over time the quality of the tenants will also be able to be proven and the space be deemed increasingly attractive. Mark Carne, Network Rail’s chief executive said: “This deal will bring more investment into the commercial estate for the benefit of the local communities and it will help fund a better railway. “I hope to see areas around the railway positively transformed with new and refurbished shops, amenities, and extra facilities for local people and passengers.” The portfolio is being sold on a long-leasehold basis as access will be continue to be required by Network Rail to undertake its maintenance and access regime that is done in cycles. Separate to Project Condor, which contains the totality of commercial estate, Network Rail has also been disposing of residential development sites. A package of sites that have the potential to deliver around 300 homes in Greater London and the South East is currently up for sale through Deloitte. It includes two in Bermondsey, SE1, one in Leyton, E10, and one in Edenbridge, Kent. There are around 200 further development sites in its ownership across the UK that it intends to dispose of by 2020. To send feedback, e-mail david.hatcher@egi.co.uk or tweet @hatcherdavid or @estatesgazette