The federal government wants out of its property ownership responsibilities and has begun a process that will get its bricks-and-mortar assets on the market.
Although a blueprint will not be ready until next year, the government has given strong hints about how it would like to proceed. The divestiture is being overseen by Public Works and Government Services Canada (PWGSC).
At issue are as many as 327 government-owned buildings across Canada that PWGSC's internal audit says are worth $3.3 billion. Heritage structures such as the Parliament Buildings in Ottawa and the Citadel in Quebec City will not go on the auction block.
The key to turning options into actions, says one top official, lies in getting the numbers right.
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| Photos courtesy Public Works and Government Services of Canada and Ian van de Burgt |
| Buildings such as Place du Portage in Gatineau, Que., below, and Calgary's Harry Hays Building, above, are among those that an internal audit says could be worth as much as $1.3 billion. |
Francois Brazeau, outgoing director general for alternate service delivery at PWGSC, says it is time to bring the government's approach to real estate more in line with the corporate goals of the private sector.
"The world of real property has changed, with more modern approaches. The capabilities of management are greater and there are more financial instruments available. We feel it is time to adopt whatever methods are necessary to yield the greatest advantage for taxpayers," he says.
High up the priority list of possible actions are selling and then leasing back some or all of the properties; entering partnerships with private buyers; or forming a real estate investment trust (REIT) that would give unitholders a market-determined return on investment.
Some of the buildings are 40 years old and and many need renovations to meet policies that require high environmental standards in government-occupied facilities, such as energy efficiency. Bringing them to those standards could cost as much as $2 billion over the next five years.
The government, however, says it does not have the money to pay for the work and needs to recapitalize the real estate through the private sector. Asset privatization on this scale is unprecedented in Canada and the real estate industry is closely watching the process, which could create a new era in public-private partnerships.
In the early 1990s, PWGSC began outsourcing day-to-day management of its buildings.
Taking the next step and outsourcing ownership is seen by Public Works and Government Services Minister Scott Brison as the best way to make the assets more efficient.
Brison has said private owners spend 20 per cent less on property asset management than the public sector. PWGSC has an annual budget of $2.2 billion to manage its real estate - including heritage sites that would not be part of any selloff.
Potential savings are in the hundreds of millions dollars, which could be used for other government programs. Brison has pegged the figure at $925 million over five years.
"There would be a huge appetite for this kind of investment because federal government buildings have very low-risk tenants. It would be almost like buying a government bond," says Dennis Devine, a vice-president with Royal LePage Advisors Inc. in Ottawa.
"Possible buyers would be everyone, everywhere, especially institutional investors like pension funds," says Devine, who specializes in commercial real estate.
The inventory is spread throughout Canada, and includes 112 buildings in Ontario, 30 in British Columbia and seven in Alberta.
Among the candidates are Place du Portage in Gatineau, which houses PWGSC's headquarters; the Harry Hays Building in Calgary; Canada Place in Edmonton; the Government of Canada building in Red Deer; the Sinclair Centre, Library Square and 401 Burrard St. in Vancouver; Natural Resources Canada's Booth Street Complex in Ottawa; and 4900 Yonge St. in Toronto. Sizes range from 12,000 sq. ft. to more than one million.
"It's a pretty eclectic package, so it's vital to get very competent people to look very, very closely at how the numbers add up. Both (public and private) sides had better get things right or this good idea could quickly turn into a bad one," says Howie Charters, managing director of commercial real estate specialist Colliers International in Vancouver.
Getting things right is exactly what Brazeau says he wants PWGSC to do. The first goal is to commission a study that "drills down on figures that show us what we should do," he says.
That includes analysing such economic issues as accurate building valuation and the cost of leases, as well as such political issues as taxpayer perceptions, government service visibility and environmental sustainability.
In April, PWGSC began soliciting industry input to decide what the study should accomplish. The study's request for proposal was to be out in June and it is expected that a contract will be awarded before the end of the summer.
Brazeau says governments in countries including Australia and New Zealand have gone the divestiture route with excellent results. He adds that the review process may dictate there be no sales at all, although that is unlikely.
"Our only goal right now is to make all the numbers available to tell us what (current ownership) is costing and what it should be costing," he says.
Colliers offered early input but has drawn back because companies involved in the analysis will not be allowed to be part of the investment.
"I can't see how a REIT would make sense here because it's based on income growth, and (the government) is talking about long-term fixed rents," Charters says.
"The methods need a lot of due diligence. From what I can understand, you'd need a pretty good leaseback to get back your investment, although the biggest issue will come from the public who'll want to know if this is a good deal for their tax dollars."
Whatever plan is chosen, there will inevitably be political fallout, says Claude Denis, an associate professor of political studies at the University of Ottawa. "It may work on a case-by-case basis, but my concern is that as a general strategy (a selloff) only produces short-term cash flow and is not a wise long-term use of public resources because it gives up too much (financial) control to the private sector," he says.
"I think Canadians intuitively feel, from an investment standpoint, that it's better to own than rent," Denis says.
Analysts such as Royal LePage's Devine believe institutionalization of real estate in Canada is not a question of if, but when, because of increased efficiency and protection against market swings.
"I believe the government should hold on to strategic properties, but with the others maybe the private sector can do a better job. The real issue is how the federal government packages and positions the properties it wants to sell," he says. "There's a tremendous amount of work to be done to get their plan anywhere near ready, and you need political will to drive this thing. That will is pretty thin right now. It would be easier to do nothing," Devine says.
Colliers offered early input but has drawn back because companies involved in the analysis will not be allowed to be part of the investment.
"I can't see how a REIT would make sense here because it's based on income growth, and (the government) is talking about long-term fixed rents," Charters says.
"The methods need a lot of due diligence. From what I can understand, you'd need a pretty good leaseback to get back your investment, although the biggest issue will come from the public who'll want to know if this is a good deal for their tax dollars."
Whatever plan is chosen, there will inevitably be political fallout, says Claude Denis, an associate professor of political studies at the University of Ottawa. "It may work on a case-by-case basis, but my concern is that as a general strategy (a selloff) only produces short-term cash flow and is not a wise long-term use of public resources because it gives up too much (financial) control to the private sector," he says.
"I think Canadians intuitively feel, from an investment standpoint, that it's better to own than rent," Denis says.
Analysts such as Royal LePage's Devine believe institutionalization of real estate in Canada is not a question of if, but when, because of increased efficiency and protection against market swings.
"I believe the government should hold on to strategic properties, but with the others maybe the private sector can do a better job. The real issue is how the federal government packages and positions the properties it wants to sell," he says. "There's a tremendous amount of work to be done to get their plan anywhere near ready, and you need political will to drive this thing. That will is pretty thin right now. It would be easier to do nothing," Devine says.
DISTRIBUTION OF BUILDINGS
* Alberta 7
* British Columbia 30
* Manitoba 10
* New Brunswick 30
* Newfoundland 38
* Nova Scotia 28
* Ontario 112
* Quebec 56
* P.E.I. 10
n Saskatchewan 6
– Source: PWGSC
