by Steven Faull
Revelations that Westminster City Council sold three cemetery sites for just 15p are still sending shock waves through the property world. This controversial transaction highlights the need for increasingly critical examination of the methods of sale to be adopted in the disposal of properties, especially those with development potential.
Selling sites is far more complex than it may initially appear. In most cases there are several options available to a property owner, and before a decision can be taken to adopt one method of sale rather than another, all the relevant factors surrounding the sale have to be taken into account.
From the outset it is necessary to consider the objectives to be achieved. In this context, both the requirements of the vendor and the aspirations of potential purchasers/tenants/investors must be fully analysed to arrive at the most satisfactory solution. The best price will be obtained only by addressing all the factors likely to influence both demand and supply.
Once the objectives have been established a strategy is required to achieve them. There are usually many alternative methods of disposal available, and the key is to select the one which successfully meets all the criteria — a solution often requiring a careful balancing act of all the factors involved.
The spectrum of methods ranges from sales by private treaty — with widespread marketing and with no given time-limit — to quiet “off the market” sales to special purchasers. Alongside these direct negotiations are sales conducted by tender. Variations on a tender theme are virtually endless, from limited tenders to selected parties — as in the case of King’s Cross — to full tenders, which can be binding or made subject to any number of conditions. Finally, there is the ultimate form of tender — sale by auction.
Sale by auction, in my view, is probably the best solution for “problem” or unusual properties, or where a sale is required by a certain date. One of the reasons that auctions — and, for that matter, binding tenders — are not appropriate in every case, is that many potential purchasers are reluctant to bid in open competition. In every case the cost of preparing a bid must be weighed against the chances of success. This consideration is particularly relevant in the acquisition of properties which are suitable for a variety of uses, and which therefore require detailed investigation and research.
Many development companies, as a matter of policy, will not bid at auction or in a tender: indeed it is highly unlikely that Rosehaugh would have speculated as much in preparation for their King’s Cross bid if this had been against a background of open competition.
At the other end of the scale, however, a quiet sale (often described as “off the market” as no marketing campaign is actually carried out) also has it potential drawbacks. The most obvious danger in this situation is that the best offer is not obtained and the property could possibly be sold on to another purchaser for a substantially increased price. In addition, “off the market” sales can often encourage gazumping offers, which sometimes leads the public to conclude that agents are “winding up” the market, when in fact the agent is only acting on the instructions of the vendor and it is in his best interest to secure the maximum price.
Our experience has shown that, unless there are special considerations, the most appropriate method of sale of intricate properties of land with mixed-use development potential is by tender. Tenders can be tailor-made to suit the particular circumstances of the property to be sold, and designed specifically to achieve the objectives of the vendor. However, even sales by tender have their potential pitfalls. If no satisfactory bids are received, for example, and remarketing becomes necessary, this can often adversely affect a prospective purchaser’s view of the property.
Consequently, it cannot be stressed too strongly that there is no one simple solution to achieving a successful disposal: each case must be treated on its merits.
Set out below are three very different examples of tenders recently undertaken which demonstrate the range of alternatives available to a vendor, and the research, analysis and judgment required in effecting a successful transaction.
Battersea Wharf
At Battersea Wharf, British Railways Property Board required the sale during 1988 of a 7.9-acre site which had become surplus to their requirements. After careful consideration of the possibilities, extensive negotiations with Wandsworth Borough Council were carried out to obtain a detailed “planning brief” for a mixed-use development on the site.
Developers were then invited to bid on the basis of this brief, by way of an informal tender on a specified date, designed to accommodate the vendor’s specific objective regarding timing. A sale price in the region of £50m was achieved and the purchasers, Parc Securities, recently obtained planning consent for over 400,000 sq ft of offices, three apartment buildings and a hotel, together with retail, restaurant and leisure facilities. The vendors achieved their objective, while the purchasers were able to use their entrepreneurial flair to maximise the volume and optimise the mix of the development.
Royal Dental Hospital
With the sale during 1987 of the Royal Dental Hospital in Leicester Square by the South West Area Regional Health Authority, timing was not such a critical issue. Consequently, two very different planning consents were obtained for the redevelopment of the property so that the site could be sold for either a refurbished 30,000-sq ft office building or a hotel.
Bids were then invited on a “subject to contract” tender to enable market forces to determine the maximum price.
The property was eventually sold to a hotel group, who unexpectedly outbid office developers, and the project is now complete.
Covent Garden
Finally, the sale last year of the former GLC properties in Covent Garden illustrates the range of different factors which need to be considered to ensure that all the objectives involved in the sale of a complex portfolio of properties are met.
The principal market buildings, known as the “core properties”, were carefully packaged for presentation and discussion with a small group of investors who were selected for their financial strengths and expertise in the care and refurbishment of historic properties. This was an important consideration for the vendor, the London Residuary Body.
More than 25 funds and property companies were approached to ascertain whether they would be interested in principle, and to establish their credentials to be shortlisted. Eventually a very small shortlist of potential purchasers was drawn up and the selected parties invited to bid. A fully documented but informal “subject to survey” tender for the “core properties” was held and a tight period for submitting proposals stipulated.
From the varying proposals obtained, the final contract was negotiated by private treaty against a known and accepted deadline. It is now a historic fact that GRE Properties’ bid was eventually brought to a successful conclusion by much detailed negotiation.
The sale of the second phase of “non-core” properties was somewhat more straightforward by comparison. For political and practical reasons a sale by binding tender was chosen, requiring a best bid on a once-and-for-all opportunity. Nearly 70 bids were obtained, enclosing bankers’ drafts totalling more than £8m in deposits.
By employing this combination of methods of sale a realisation well in excess of £100m was achieved.
In conclusion, therefore, as can be seen from this brief overview — which perhaps poses as many questions as it answers — every site is unique, and a different set of circumstances applies. Very often a balancing act has to be performed calling for experienced professional judgment, and there is certianly no blueprint for success which can be applied in every case.
Nevertheless, one ingredient is essential to the success of any sale. Careful consideration must be given to all the relevant factors, including the objectives and aspirations of all the parties involved, the priorities of the vendor and ultimately the method of sale to be adopted. Independent professional advice will help to ensure that all these factors are given the necessary consideration to enable the realisation from a sale to be maximised.
In the case of the cemeteries, a national outcry led to questions being asked in Parliament as to why these potentially valuable sites, which subsequently changed hands for millions of pounds among property developers, could not have been sold for a more realistic price and therefore retain the profit within the public domain.
Indeed, following a six-month investigation, district auditor John Magill, of chartered accountants Touche Ross, ruled in his recent report that the council was guilty of serious failings in the judgment and commercial abilities of both politicians and officers in the events leading up to the sale.
To be wise after the event is always easy, but while the phrase caveat emptor is well known the size and complexities involved in the sale of sites may make caveat vendor — let the seller beware — an equally applicable phrase in the future.
Steven Faull MA (Cantab) ARICS is a partner of Donaldsons, specialising in commercial agency.
