Guy Hands and Annington Homes, rather than taxpayers, benefited from soaring UK property market after 1996 privatisation
The UK government wants to reverse a controversial privatisation deal by seeking to wrest ownership of 38,000 homes in the Ministry of Defence housing portfolio from the billionaire private equity boss Guy Hands.
The move is expected to lead to a legal battle between the MoD and Hands’ private equity firm Terra Firma over whether the government can take back full ownership of the homes.
In 1996, under the defence secretary Michael Portillo, the Conservative government sold 57,400 houses used by military service men and women and their families to Annington Homes for £1.7bn in a sale and leaseback deal. In one swoop, Annington became the biggest residential property owner in England and Wales. The MoD rented back the homes on a 200-year lease at a discount but also agreed to pay for their maintenance and refurbishment.
The value of the properties has ballooned under Annington’s ownership to many times their original purchase price, meaning the taxpayer has missed out on any profits from the property boom. They were valued by Annington at £7.6bn last year, while their vacant possession value is estimated at £10bn. The MoD is paying about £180m a year in rent plus £140m in repairs and upgrades.
Terra Firma, which bought Annington from Nomura Holdings for £3.2bn in 2012, said it would challenge the MoD’s move, and that it expected to win in what it predicted would be a “very long and very expensive” court case.
At the time of the deal the MoD hoped to free up cash for renovation as the homes were falling apart.
However, the National Audit Office concluded in a 2018 review that taxpayers were between £2.2bn and £4.2bn worse off as a result of the arrangement. The NAO said the MoD had “lost out on billions of pounds’ worth of increases in asset values, while Annington has made a significantly higher return on its investment than expected”.
The MoD has terminated its lease on more than 17,000 properties, and now rents just over 38,000 houses and flats from Annington.
Jeremy Quin, the minister for defence procurement, said in a written statement to the House of Commons on Thursday: “Given our obligations to secure value for money, we have reviewed MoD’s current arrangements with Annington” and that the “department will explore the exercise of its statutory leasehold enfranchisement rights to buy out Annington’s interest in the homes and gain full ownership rights”.
Quin told MPs that the ministry had made a single claim for one house in a test case, and planned to submit a further claim for another house in the near future.
He said if the cost of recovering full ownership was less than the present value of the MoD’s ongoing liabilities, “such a transaction is likely to represent good value for money. The MoD would then benefit from any future appreciation in value of the units”.
Terra Firma is reportedly looking to sell Annington. Hands was involved in Nomura’s purchase of Annington in 1996, when he worked at the Japanese bank.
Under the arrangement, the MoD rents back thousands of houses for members of the armed forces and their families. The original deal gave the MoD a 58% discount on renting the houses for the first 25 years, which was reduced to 49.6% in a rent review that took two years to negotiate and concluded in November. This will increase the rent bill by £36m a year.
Quin said the MoD had served notice on Annington under section 5 of the Leasehold Reform Act 1967 of its desire to enfranchise a house currently leased from Annington. “Annington, through its lawyers, has notified the MoD that it is considering the impact of the claim and has put the MoD on notice of a potential dispute,” he added.
In a statement, Terra Firma said: “Annington has been aware since mid-December of the MoD’s attempt to enfranchise a single property in Cranwell.
“This is the first time the MoD has indicated in any forum that it wishes to enfranchise more than one unit. We believe that regardless of any legal merit, reneging on agreements that had been operating for over 25 years is an appalling thing for the British government to do.
“Our advice is that while this will be a very long and very expensive legal dispute, we will prevail. However, clearly this does put the sale of Annington on hold. This is clearly extremely negative for the investors who include various UK pension funds and sovereign wealth funds representing strategic military allies of Britain.”