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13.10.14

Network Rail’s £200m shopping centre bid still under consideration despite ORR concerns

Network Rail’s £200m bid to become sole owner of the Grand Central shopping centre at Birmingham New Street station is still “under consideration”, despite rail regulator fears that the business case is “not compelling”.

The rail infrastructure operator is helping Birmingham City Council redevelop the site as part of its revamp of Birmingham New Street station. The transaction would be Network Rail’s biggest ever retail purchase, and its directors believe it makes sense to own Grand Central, which will take the place of the old Pallasades Shopping Centre, given the number of train passengers that shop there.

However a letter sent to Network Rail this summer from Daniel Brown, strategy and policy director at the office of Rail Regulation, said: “Our assessment is that the business case for the acquisition is not compelling.”

Despite agreeing that if Network Rail were to have full ownership of the integrated railway station and shopping centre it would have full control of pedestrian flows and be able to maximise safety procedures, as well as have complete control over any future physical changes, the rail regulator has concerns over the financial risk involved in the transaction.

The financial concerns centre on the risks in the size and structure of the transaction, and the strength of Network Rail’s due diligence process.

Brown says in his letter: “Network Rail has chosen not to seek a completely independent valuation in recent months. Nor are we satisfied that Network Rail’s own due diligence process has included robust stress testing of the internal valuation and a comprehensive risk assessment.

“Network Rail needs to invest where it considers that it will make the highest rate of return for that investment. On the basis of the data and models we have seen, the acquisition of the Grand Central shopping centre does not appear to provide sufficient value for money.”

In Network Rail’s latest published board minutes, chief executive Mark Carne added that the government has “also to be persuaded of the rationale” for the purchase. This is due to the reclassification of the rail operator as a central government body which took place in September.

Despite the reservations of the ORR about the purchase, when RTM asked Birmingham City Council about the potential sale a council spokesperson said that the option was still “under consideration”.

A Birmingham City Council spokesperson said: “We have joint ownership of the Grand Central Shopping centre, and we’re looking forward to it opening in September 2015 and its ongoing success. As part of the business case for redeveloping the shopping centre, it was envisaged that the council and Network Rail would consider future ownership options. This work is underway with the option of Network Rail becoming the sole owner being one option under consideration."

Network Rail said that commercial property activity plays an important role in helping to fund the rail network, as all proceeds from these commercial activities are reinvested into the railway.

A spokesperson added: “While no decision on the future ownership of Grand Central has yet been made, the company can confirm it is in discussions with Birmingham City Council about a potential purchase, but an outcome is many weeks away. Any decision would be subject to the approval of the Office of Rail Regulation and the Department for Transport.”

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