MoD up to £4.2bn worse off after military homes sell-off, report finds
The Ministry of Defence is up to £4.2 billion worse off after selling tens of thousands of military homes two decades ago, Whitehall's spending watchdog has said.
In 1996, the MoD sold more than 55,000 service family homes across 770 sites to Annington Property Limited in return for a £1.66 billion upfront cash lump sum.
The MoD has since rented them back on 200-year underleases, and is paying more than £178 million a year for the remaining 39,000 properties, a National Audit Office (NAO) report has discovered.
The NAO said it also found that mainly due to actual house price increases over the first 21 years of the contract, the MoD is £2.2 billion to £4.2 billion worse off over that period than if it had retained the estate.
The report states that although the house price and rent increases could not be foreseen, the MoD's assumptions at the time of sale were "over-cautious".
It indicates how the MoD business case model assumed house price increases of 1% per year excluding inflation - with a 3.9% increase, excluding inflation, now the actual figure.
Amyas Morse, head of the National Audit Office, said the sale and leaseback deal was "based upon pessimistic views of the future growth in property values".
Mr Morse also highlighted how there was a "mitigating feature that the rents charged to the military families who lived there were restricted for the first 20 years".
"This has cost the public sector a great deal in capital growth, and it has been a great deal for the landlord," Mr Morse said.
"In 2021 the period of restricted rents is over. The question is now whether the landlord will get a very large rent increase on top of the very substantial capital gains they have already received."
The NAO report noted how the returns to Annington Property Limited have been "significant".
But from 2021 the way in which the rents are calculated are set to change - with contrasting beliefs from both the MoD and Annington Property Limited on what should occur.
While the MoD thinks there are a number of reasons why rents should fall, the company is looking to a rise of £84 million a year, the NAO said.
The decision will set the rent assessments criteria for the next 175 years of the contracts.
According to the NAO, the MoD has "started to prepare for the site-by-site rent reviews but has not yet begun contingency planning" or assessed alternatives, and must be "ready and able to conduct rent negotiations on an equal footing".
"It cannot do this effectively if it does not have more clarity about its options for the future of service family accommodation," the report adds.
"Many billions of pounds are at stake, and were the department not to be ready when detailed negotiations start it could sacrifice very significant public value."
The report's findings come amid a £20 billion black hole in the defence budget over the next 10 years, and widespread speculation of cuts to personnel and equipment in a bid to try to save cash.
Meg Hillier, chairwoman of the Public Accounts Committee, said the sale of the 55,000 homes has "turned out to be a rotten deal for the taxpayer".
"There is a risk that when rents come up for renewal the next deal will be even worse," she added.
The NAO report also highlights how the deal "did not generate the improvements in the management of the estate that families who live in the properties would have hoped for".
It also said the MoD is required to return surplus properties to the company in a "good tenantable repair and decorative order" - but since 2004, doing this has cost on average £11,369 per surrendered unit.
With a vacancy rate on the Annington estate at 19%, the NAO said it is aware of at least one site which has 80 properties retained in this way since 1996.
"In April 2017 the department (MoD) was continuing to pay rent on 7,259 empty Annington properties. If these properties remained empty for the whole year, the department would pay over £30 million in maintenance and rent on them," the report said.
The NAO also notes how the MoD has retained certain properties to allow for the return of 4,000 troops from Germany by 2019.
But the head of the Army, General Sir Nick Carter, paved the way for a potential U-turn on this decision during a recent speech, owing, he said, to a growing threat from Russian aggression in Europe.
An MoD spokesman said: "The NAO supported the Annington deal in 1997 and is clear that the surge in house prices could not have been predicted.
"We have a team working on renegotiating the deal, and believe that rent prices should continue to fall to secure value for money for taxpayers."