Mapeley

Bank Abbey National has made a big deposit - putting all its property holdings into the hands of Mapeley, the outsourcing company. The �457m deal, agreed last month, provides a new model for the outsourcing of large corporate property portfolios. Mark Cooper investigates.

In 1998, Mike McNamara and Paul Vernham of Ernst & Young's real estate division approached UK bank Abbey National with the suggestion that it re-examine its property requirements. They pointed out that restructuring Abbey's massive occupational portfolio could save millions of pounds.

Not surprisingly, Abbey National's property and finance people responded positively and set up a special project team. After more than a year of planning and six months of bidding, Abbey National agreed earlier this month to transfer both the freehold assets and the leasehold obligations of its 603,900m2 (6.5m sq ft) property portfolio to the George Soros-backed outsourcing company Mapeley.

Mapeley paid �457m for the portfolio and Abbey will take a series of structured lease-backs for between one and 20 years. It is the first sale-and-leaseback deal for a company's entire portfolio.

McNamara believes that the deal is a "landmark" in corporate property deals" and will spur other companies to restructure their property. "A number of major UK and European companies have been looking at doing something with their property for a couple of years. This might make them take action," he says.

Investment bank JP Morgan recently suspended its moves towards a property outsourcing an companies such as ICL, Royal Bank of Scotland and HSBC have investigated options, but none has managed to get a deal off the ground.

The deal has netted Abbey �70m in profit against initial payments of around �80m a year in rent. While Ernst & Young estimates that Abbey's new lease profile saves it �200m over the life of the contract, Abbey's director of group property, John Price, says that the primary objective was not to release capital.

"The idea is that it will match our portfolio to our business plans," he says. The bank was particularly concerned about the effect that e-commerce would have on its business. It might need fewer branches, or a greater number of smaller branches offering different services. For example, the first new-concept branch was opened in King's Road, Chelsea this week, complete with Costa Coffee outlet.

Abbey hopes to enhance the "bank experience" through installing Costa Coffee bars in leading branches. "They will have comfy seats and sofas and give customers access to interactive television and our call centres. The idea is to make our branches more approachable and get away from the intimidating banking hall feeling," says a spokesman.

While a sale-and-leaseback deal of this size is not unusual - UBS undertook a SFr875m (�350m) deal in Switzerland in 1999 - Abbey's portfolio is mostly leasehold property. Other outsourcing deals have involved freehold properties and most of the corporate leasebacks have been on standard institutional terms.

One of the main obstacles for corporate outsourcing contracts, as opposed to the public sector, is the issue of pricing the risk of taking on leaseholds.

The leasehold pricing problem

Abbey National's property dilemma consisted of 1,302 properties covering 603,850m2 (6.5m sq ft); 772 leasehold and subleases; and 400 freeholds and long leases.

Mapeley solved the leasehold pricing problem by valuing the cash-flow generation of the portfolio, rather than just the value of the freehold element, says chief executive Robin Priest. "For a deal of this nature to work, the portfolio needs to have a good spread and to be substantial," he says.

"We can assess the risk over several areas and lengths of tenure. You have to look at the whole portfolio and in detail at each of the properties - are there marriage value options? How long do we expect Abbey to occupy the property? How long might a property remain empty after Abbey has vacated it?"

Priest believes that similar deals could be struck for an entirely leasehold portfolio, but that it would be harder to price the risk and inevitably more expensive for the company. "But it would still be less expensive than not being in the right property at the right time," he says.

According to a director of one UK property group which bid for the Abbey contract, overcoming the leasehold obstacle was a major step forward. "No one has been able to work out a deal where the risk of taking on leasehold obligations has been effectively priced," he says.

"But the fact that Abbey National was realistic in terms it asked for undoubtedly helped."

Nicky Wilden, a director Jones Lang LaSalle's corporate finance division, says the deal proves the value of corporate outsourcing. "We've spoken to a lot of pan-European companies which are looking for similar solutions, and this deal will be boost for their efforts.

"One of its key factors is doing away with rent reviews - as Abbey's rents are indexed on a straight-line basis, it has saved a lot of management time and effort. Other firms which have used conventional leasebacks have found they end up dealing with a lot of rent reviews at once," she says.

Funds get appetite for outsourcing

There is plenty of investor interest in backing viable outsourcing contracts, says Wilden. "As well as US money, the more savvy European institutions see this as a way to get hold of more product."

Funds like LaSalle Investment Management's Euro 5 fund and some of AIG's European funds are also looking at the area. She points to the interest in Deutsche Telecom's proposed sale-and-leaseback of a �1.5bn portfolio as proof of the amount of money targeting corporate property.

The deal will be an important step for UK property consultants as well as for occupiers. Mike Hatt, head of Nelson Bakewell's corporate retail consulting team, which advised Abbey, says: "This will really change our world. We are already talking to people about similar deals and I expect we will see at least a couple a year going forward. Now it's been proved that a deal can be done - and quickly too - we'll see a lot more.

"I wouldn't want to pretend these deals are easy, or that you can come up with a set-product which can be rolled out for one and all, but we will see a lot more of this."



ABBEY NOTIONAL. Mark Cooper Bank Abbey National has made a big deposit - putting all its property holdings into the hands of Mapeley, the outsourcing company. The �457m deal, agreed last month, provides a new model for the outsourcing of large corporate property portfolios. Mark Cooper investigates. In 1998, Mike McNamara and Paul Vernham of Ernst & Young's real estate division approached UK bank Abbey National with the suggestion that it re-examine its property requirements. They pointed out that restructuring Abbey's massive occupational portfolio could save millions of pounds. Not surprisingly, Abbey National's property and finance people responded positively and set up a special project team. After more than a year of planning and six months of bidding, Abbey National agreed earlier this month to transfer both the freehold assets and the leasehold obligations of its 603,900m2 (6.5m sq ft) property portfolio to the George Soros-backed outsourcing company Mapeley. Mapeley paid �457m for the portfolio and Abbey will take a series of structured lease-backs for between one and 20 years. It is the first sale-and-leaseback deal for a company's entire portfolio. McNamara believes that the deal is a "landmark" in corporate property deals" and will spur other companies to restructure their property. "A number of major UK and European companies have been looking at doing something with their property for a couple of years. This might make them take action," he says. Investment bank JP Morgan recently suspended its moves towards a property outsourcing an companies such as ICL, Royal Bank of Scotland and HSBC have investigated options, but none has managed to get a deal off the ground. The deal has netted Abbey �70m in profit against initial payments of around �80m a year in rent. While Ernst & Young estimates that Abbey's new lease profile saves it �200m over the life of the contract, Abbey's director of group property, John Price, says that the primary objective was not to release capital. "The idea is that it will match our portfolio to our business plans," he says. The bank was particularly concerned about the effect that e-commerce would have on its business. It might need fewer branches, or a greater number of smaller branches offering different services. For example, the first new-concept branch was opened in King's Road, Chelsea this week, complete with Costa Coffee outlet. Abbey hopes to enhance the "bank experience" through installing Costa Coffee bars in leading branches. "They will have comfy seats and sofas and give customers access to interactive television and our call centres. The idea is to make our branches more approachable and get away from the intimidating banking hall feeling," says a spokesman. While a sale-and-leaseback deal of this size is not unusual - UBS undertook a SFr875m (�350m) deal in Switzerland in 1999 - Abbey's portfolio is mostly leasehold property. Other outsourcing deals have involved freehold properties and most of the corporate leasebacks have been on standard institutional terms. One of the main obstacles for corporate outsourcing contracts, as opposed to the public sector, is the issue of pricing the risk of taking on leaseholds. The leasehold pricing problem Abbey National's property dilemma consisted of 1,302 properties covering 603,850m2 (6.5m sq ft); 772 leasehold and subleases; and 400 freeholds and long leases. Mapeley solved the leasehold pricing problem by valuing the cash-flow generation of the portfolio, rather than just the value of the freehold element, says chief executive Robin Priest. "For a deal of this nature to work, the portfolio needs to have a good spread and to be substantial," he says. "We can assess the risk over several areas and lengths of tenure. You have to look at the whole portfolio and in detail at each of the properties - are there marriage value options? How long do we expect Abbey to occupy the property? How long might a property remain empty after Abbey has vacated it?" Priest believes that similar deals could be struck for an entirely leasehold portfolio, but that it would be harder to price the risk and inevitably more expensive for the company. "But it would still be less expensive than not being in the right property at the right time," he says. According to a director of one UK property group which bid for the Abbey contract, overcoming the leasehold obstacle was a major step forward. "No one has been able to work out a deal where the risk of taking on leasehold obligations has been effectively priced," he says. "But the fact that Abbey National was realistic in terms it asked for undoubtedly helped." Nicky Wilden, a director Jones Lang LaSalle's corporate finance division, says the deal proves the value of corporate outsourcing. "We've spoken to a lot of pan-European companies which are looking for similar solutions, and this deal will be boost for their efforts. "One of its key factors is doing away with rent reviews - as Abbey's rents are indexed on a straight-line basis, it has saved a lot of management time and effort. Other firms which have used conventional leasebacks have found they end up dealing with a lot of rent reviews at once," she says. Funds get appetite for outsourcing There is plenty of investor interest in backing viable outsourcing contracts, says Wilden. "As well as US money, the more savvy European institutions see this as a way to get hold of more product." Funds like LaSalle Investment Management's Euro 5 fund and some of AIG's European funds are also looking at the area. She points to the interest in Deutsche Telecom's proposed sale-and-leaseback of a �1.5bn portfolio as proof of the amount of money targeting corporate property. The deal will be an important step for UK property consultants as well as for occupiers. Mike Hatt, head of Nelson Bakewell's corporate retail consulting team, which advised Abbey, says: "This will really change our world. We are already talking to people about similar deals and I expect we will see at least a couple a year going forward. Now it's been proved that a deal can be done - and quickly too - we'll see a lot more. "I wouldn't want to pretend these deals are easy, or that you can come up with a set-product which can be rolled out for one and all, but we will see a lot more of this."