Another Housing Privatisation Disaster

When the Ministry of Defence sold its armed forces housing in 1996, it already looked a bad deal: 57,000 houses were sold for £30,000 each, well under half the average house price at the time. Overnight, the sale created Britain’s biggest private landlord and gave it a blue chip tenant – the MoD. Yet the company that won the contract, Annington, had just been set up and had no experience of management on such a scale.

Soldiers and their families have to live close to their work, which usually means in houses built on or near military bases, often three-bed semis with ample gardens. For decades they were managed directly by the MoD. The task isn’t straightforward: soldiers may be away for months at a time, they can be moved around at short notice and the bases are often far from towns and public services. The MoD was also badly behind with repairs: by 1996, a backlog of over £400 million of work had accumulated.

A well-planned contract could have led to proper management and repair, financed part of the cost from sales of surplus properties, and made sure the private sector shouldered any financial risk. Instead, Annington was offered a cash cow. House prices were increasing by 6 per cent annually in the late 1990s but the valuation assumed they would go up by only 1 per cent. Annington could sell off surplus stock and pocket most of the profits. Its income from the houses it kept was guaranteed, as the MoD leased them back whether or not they were occupied. The deal also left the MoD responsible for repairs and management, with the Treasury allowing it to keep only £100 million from the sale to help pay for them. The rest had to be funded from what was left of the rent deducted from soldiers’ pay.

Soon after the sale, the National Audit Office concluded that Annington was likely to make an annual return of 9.7 per cent. Twenty years later, having looked again, it found the actual return is more than 13 per cent. The government is at least £2 billion and possibly more than £4 billion worse off than it would have been had it hung onto the houses. Because the backlog has never been tackled, the MoD foots a £11,000 repair bill every time it hands a property back to Annington. A fifth of the houses it leases are unlet and produce no rent. Yet Annington is paid even if a house is empty, behind the wire of a military base, awaiting demolition. The MoD seems blasé in the face of the NAO’s criticism, claiming that the NAO has vindicated its view that ‘the surge in house prices could not have been predicted.’

Annington is a subsidiary of the private equity firm Terra Firma, which also owns Four Seasons Health Care, the care home company struggling with huge debts that could yet put 17,000 elderly residents onto the streets. Terra Firma’s chairman, Guy Hands, was described to the FT by an industry colleague as an ‘acquired taste, like Marmite’. When the MoD lease agreement ends in 2021 Hands is looking to hike up his charges in line with private sector rents.

The MoD made another blunder in 2014 when it stopped managing and repairing the houses itself and put the work out to tender. Within two years, the new managers were described by a Commons committee as ‘badly letting down service families’. The contractor, CarillionAmey, is an offshoot of Carillion, the outsourcing firm that has just gone into liquidation, but it says it has ‘no concerns’ about its ability to continue trading. Military top brass say they would be better off managing the houses themselves.

I talked to several MoD managers when the first privatisation took place. It was clear some key questions were never asked. If handling a dispersed property portfolio was problematic for the MoD, which had done it for decades, why would inexperienced companies set up to bid for the contracts do a better job? Why did the Treasury keep most of the money from the original sale, leaving the MoD with rising costs, and assets it didn’t own but had to repair? Who ignored the experienced non-profit landlords, whether local councils or housing associations? Couldn’t empty homes that weren’t on bases have been rented to families on local waiting lists? Even before twenty years of mismanaging public assets had begun, handing the homes over to social landlords seemed not just the right solution, but the obvious one.