Business focus: A long ride ahead in battle for control of Network Rail arches

Imagine if EastEnders’ hard nut Phil Mitchell was told his beloved garage the Arches was getting a new landlord and could be facing rent hikes. His response might be: “you wanna watch your mouth.”

If the soap’s writers want inspiration for a Walford story like that, they need only look at what is happening in real London now.

For the past 10 months traders based in railway arches have been on tenterhooks about their future following a contentious plan by Network Rail to sell its £1.5 billion commercial property portfolio.The sale includes more than 4400 converted arches, over half of which are in London.

This Friday is the deadline for second-round bids, and buyout behemoths are expected to battle hard for what one property expert dubs “a goldmine”.

The race is between Hong Kong-based investor CK Asset Holdings, Guy Hands’ Terra Firma, ex-Sunderland AFC owner Ellis Short’s Kildare Partners and a consortium ofproperty giants Blackstone and Telereal Trillium. Funds managed by Goldman Sachs and Wellcome Trust have pulled out, as the Evening Standard revealed last month.

The auction (or plot, if BBC producers are reading) run by Rothschild has not been without drama. Firms that occupy some of the properties, including hairdressers, breweries and gyms, have voiced concerns about mega rent rises under both the existing and new ownership. Meanwhile, some critics are worried the arches will lose their independent retail charm and be replaced by High Street chains.

That has prompted politicians to question the merits of a disposal, and led to other methods being proposed to replace an outright sale. It could be a long ride between now and Friday as investors weigh up whether the potential political fallout from a deal is worth it and as Network Rail attempts to soothe tenant fears.

The state-owned firm which runs the UK rail network thinks its estate is non-core. As Network Rail Property’s managing director David Biggs puts it: “Our role is to run, improve and grow the railway. Managing commercial properties isn’t essential to that and selling the estate will allow us to focus more on what we’re ultimately here to do.”

The portfolio is being sold on a 150-year lease. By retaining the freehold Network Rail can continue to have ultimate control for future safety, access and maintenance requirements.

Proceeds from the sale will be put towards a railway upgrade plan and reducing Network Rail’s debt pile. Under the sale plans, all current leases will transfer to a new owner, with notice and rent review periods unchanged, he says.

He adds: “It’s right that we sell to a new owner who we believe will have more freedom and creativity to invest in and develop the estate.”

He calls the estate “thriving”, which is something Colin Hargreaves, a director at Gryphon Property Partners, agrees with when looking at London Bridge.

Hargreaves says: “Once damp, cheap space, the railway arches there have become a goldmine for tenants and their landlord. With the advent of an upgraded station, the Shard and Borough Market, the arches now form an integral and profitable part of this fashionable South bank destination.”

Mark Fisher, at property agent Union Street Partners, says investors have been impressed by rising footfall. “Artwork, cleaning and new lighting has created a more pleasant walk through the viaducts,” he points out.

As the popularity of the arches has grown, so too have rents. The Underdog Gallery at the Crucifix Lane Arch near London Bridge has seen rents quadruple since 2014.

The gallery is one of hundreds of traders represented by campaign group Guardians of the Arches, which is no big fan of Network Rail but wants to stop the impending outright sale to one buyer.

New Economics Foundation, a think-tank supporting the organisation, claims the average firm in an arch contributes about £160,000 to the nation’s economic output each year.

They have written to transport minister Jo Johnson to demand safeguards for tenant interests.

Their proposals include pausing the sale to allow local councils to make offers. It’s an idea Hackney Mayor Philip Glanville supports, as he thinks local authorities will prioritise encouraging start-ups rather than upping rents to boost income.

Other ideas include ensuring any new owner will not set rent rises exceeding 20% over a three-year period.

The Department for Transport says it will respond to the proposals in due course, but Johnson has started making noises that suggest he wants small firms protected. A spokesman says: “It is important to note that all existing leases will transfer to the new owner, all current arrangements and minimum protections will remain unchanged, and the sale will support local businesses because of the greater investment a new owner will bring.”

Will Brett of the New Economics Foundation responds: “Whoever owns the arches in the future, they will need to listen to this large, united and powerful group of tenants.”

Network Rail hopes a sale will be concluded by the end of the year. It should expect a noisy journey getting there, with plenty of drama Phil Mitchell would relish.

ON OFFER

The bidders are vying for an estate which comprises 5500 properties across England and Wales.

Of those, 4455 are converted railway arches. More than half are in London.

TENANT PAINS

Sammy Forway has been running his contemporary gallery and events space The Underdog at the Crucifix Lane Arch, London Bridge, since 2011.

The entrepreneur says the rent has quadrupled since 2014 and he is worried about hikes. That has deterred him from investing more in the site.

He warns: “It’s not good economics to price out potential business in the hope that the big boys will pay over the odds for space that small viable businesses can no longer afford.

“It actually erodes the character and works against the commercial potential of an area when there are empty spaces that no one can afford.”

He hopes any new owner “will be sympathetic to the tenants who have worked hard to improve the arches themselves and have become a major part of the London business landscape”.