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10 September 2019updated 25 Jul 2021 3:12pm

How the £1.5 billion railway arch sell-off is affecting small businesses

Network Rail's "property disposal" means thousands of companies are facing an uncertain future.

By Jonny Ball

Under the raised railway lines of South and East London – the semi-industrial spaces of garages, repair shops, design studios, cafes, bars and a whole range of startups attracted by the relatively low rents – a group of small business people have come together to form Guardians of the Arches, a tenant organisation which represents the interests of small businesses on railway property. The Guardians have now developed into a national organisation, which, a spokesperson told the Financial Times last year, could morph into a “trade union for small businesses”.

Initially opposed to large rent hikes by their old landlord, Network Rail, the group made headlines at the end of 2018, when it was announced that Blackstone, an American private equity firm, and Telereal Trillium, a multi-billion pound property management and development company, would be purchasing an 150-year lease on Network Rail’s 5,261 rental spaces for a price of £1.46bn, becoming the UK’s largest landlord for small businesses.

Prior to the sale, Network Rail, a public body, “were trying to realise the local increased value at every rent review possible,” says Chris Hill, a wine merchant operating from a railway arch in Leeds, and a member of Guardians of the Arches. “A few businesses in Bethnal Green and Hackney were presented with unbelievably large demands for rent increases and rent reviews, because of gentrification – because the perceived value of these properties had gone up in these areas… The [Guardians] came about from fighting what were, in some cases, just ridiculous demands of, initially, 300 per cent. But then, through battling, things were coming down to 160-odd per cent. Still an enormous jump when you’re running a small business.”

According to a letter the group sent to Jo Johnson, the then railways minister, in August 2018, Network Rail had approached one railway arch tenant for a rent increase of 345 per cent, before the arches were sold on to private owners just months later. That particular increase was delivered to a 93-year-old mechanic who had been supplying drivers with MOTs for 60 years, until Network Rail announced rent would more than triple from £33,000 to £147,000 a year. The suspicion of many small businesses is that Network Rail was raising rents in advance of privatisation, increasing its revenue stream to boost the eventual sale price.

In the final year of Network Rail’s management of the arches it received £83m in rent from its SME tenants. However, in a National Audit Office report released in May, it was revealed that, in the course of the sale, Network Rail had factored in a doubling of rental income from the properties over the next nine years, to £160m a year by 2027 – an attractive prospect for all of the 35 initial private bidders in the first phase of the sale. “[Rent] inflation is built into the deal,” Chris says.

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Another contractual stipulation highlighted to Spotlight by Meg Hillier MP, chair of the Public Accounts Committee (PAC), is that the new multinational landlords, “can break the Landlords and Tenant Act of 1954. The new tenants won’t have the same protections as existing tenants,” meaning they will be automatically denied security of tenure. Following an inquiry, the PAC will publish a full report into the sale, planned for the autumn.

Many tenants were “essentially being priced out of the market because Network Rail decided that they should be paying more rent in line with unsustainable commercial property bubbles in the middle of London,” says Chris. “[They] were using every tactic that they could to hike up the rents on the arches. Then the Department for Transport decided Network Rail had to reduce their debt. So they had to flog off some of their assets, as demanded by Chris Grayling – at the time.” But it is in the nature of these sales that the state only receives a one-off cash payment, and loses an essential asset, or piece of infrastructure, that could potentially provide income for generations to come, as well as providing secure working spaces for small business people and traders – “everything from bakeries in Hackney to gin cafes in Gateshead,” Hillier says. Her interest in the arches stems not only from her position on the committee but also as a constituency MP in Hackney South and Shoreditch. As she pointed out at a PAC hearing in June, “what is left to sell if there is another gap in funding?” In an agreement between the Department for Transport, the Treasury and Network Rail, the organisation can use £500m of the proceeds from the sale to plug its funding shortfall. The remainder will be used to offset borrowing from the department.

The sale of public property as a quick fix for funding and budget issues is not unique to Network Rail. “In a way,” Hillier warns, “Network Rail and the sale of arches is presaging the potential sale of other assets.” Public bodies, in particular local authorities across the UK, are currently attempting to deal with severe budgetary constraints, and are finding short-term solutions to their financial problems by trading their land assets for cash, a boon to developers and large landowners. Start Me Up, a 2016 report into the value of workspaces for small businesses, entrepreneurs and artists, conducted by the Institute for Public Policy research, found that “decreased local authority spending has led to sharp rent increases for council owned property.” Labour has called for the end of the “sell-off of public land to the highest bidder,” criticising a process which is largely under-scrutinised and about which there is little transparency.

While public procurement at the local level is heavily regulated, and while regulations state that local spending above £25,000 has to be published as open data, there is little clarity around so-called “property disposals” in the public sector. In addition to budget cuts forcing difficult choices, since 2015 the government has operated with a target of selling £5bn of public land assets by 2020, ostensibly linking the policy with a move to free up idle land and encourage developers to build much-needed housing. But, according to a report into the government’s land disposal strategy by the National Audit Office, “Network Rail excluded land with known residential development potential from the sale” – which means that no houses will be built on the privatised sites. Evidence heard by the PAC from Charles Roxburgh, second permanent secretary at the Treasury, revealed that the arches sale “rescued” the previously unmet £5bn target.

“The railway arches are, in some respects, a microcosm of what’s going on in the world of small business generally,” says Will Brett, a former director of communications at the New Economics Foundation (NEF), who now acts as a consultant and spokesperson for Guardians of the Arches. “In other ways it’s quite particular, because you have these properties that have always been sub-market – they’ve always been damp, noisy, a difficult shape, no ventilation. For that reason they encouraged all sorts of start-ups and exciting incubators of small business, precisely because they’re sub-market, and because small businesses find it hard to find space in the modern commercial property market these days.”

Research by NEF, conducted prior to the privatisation of the arches, found that railway arch businesses, 99 per cent of which are not large chains, contribute £725m to the UK’s GDP every year. In addition, before the sale, they were contributing £83m in rental income to the public coffers. Now, post-sale, if the planned rent projections are to be believed, they’ll be contributing double that, but to a private consortium. In the process, the worry is that many of the existing businesses will have to leave. “A public asset, belonging to you and me as a taxpayer,” Hillier says, “is being sold off, on this long lease, with nothing to stop the company then selling it on.” The future of many small businesses under the arches now hangs in the balance.

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