How real estate can financing railways?

28/09/2020 – By Frédéric de Kemmeter – Railway signalling and freelance copywriter – Suscribe my blog
(Version en français)
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The railway is a sector that brings very little return. Other adjacent areas could bring in additional income, but not by selling frenetically. Explanations.

The real estate assets of the railways are the subject of debate in political circles. Some criticize the dark and capitalist side, contrary to the « railway spirit » (which is difficult to define…). Others, on the contrary, see an opportunity to bring money into a highly indebted sector that lives only on public subsidies. Let’s first look at the figures.

Railway companies have impressive land holdings. In Switzerland, the state railway SBB is one of the largest land owners in the country. 94.4 km² is the area of land owned by the former state railway – twice the size of the Canton of Basel-Stadt. Around a quarter of this area is not used for railway operations. In Belgium, the SNCB has 6,000 hectares of land and around 2,350 buildings in its real estate portfolio. In France, SNCF Immobilier owns 20,000 hectares of land and 25,000 buildings, most of which are located near railway stations. This heritage is very scattered and very old, with an average age of 74 years. Network Rail owns approximately 51,700 hectares (127,800 acres), which it uses to operate and develop Britain’s railway infrastructure, but this figure does not say whether this also includes the surfaces used by the tracks.

It is important to distinguish three areas:

  • the railway stations, which are assets not for sale, but from which income can be earned through the rental of commercial space;
  • the property around stations, which can generate income and be the subject of an urban or neighborhood project;
  • assets that no longer offer any added value for railway operations and can be sold to investors.

Railway installations, such as workshops and rolling stock sidings, are obviously not included in the building stock. However, their eventual removal due to restructuring will free up land that can sometimes be put up for sale or converted.

In the past, the railways were innovative and allocated housing to railway workers, in the immediate vicinity of their depots, through co-operative formulas or other. Today, this housing heritage still exists in many state operators. The French company still owns housing to accommodate railway workers as close as possible to where they take up their posts, which is essential for the smooth running of the rail system. « Our social housing is occupied by one-third railway workers and two-thirds salaried households, » explained in 2019, Benoît Quignon, the head of SNCF Immobilier.

Assets put up for sale
The big question, which is often the subject of much controversy, is what use can be made of such land and buildings. Some of them are located in the very heart of the city, and are the object of a great deal of covetousness, which is often contradictory, depending on the political coalition which governs the city. Releasing land for homes is not new to railways companies. Every railway company has its reasons for selling land or buildings. In Switzerland, in 2007, SBB’s government objective was to restructure the pension fund, a pillar of the railway system that was always intended to be « different » from common law. As a result, it is very expensive. 

Another, more traditional objective is to reduce real estate debt. In France, the SNCF for example, sold in 2018 nearly 80% of its portfolio of 4,000 housing units, valued at €1.4 billion, mainly located in Paris, Lyon and Marseille. It is not always clear where the proceeds of these sales go next. David Biggs, managing director of Network Rail Property in UK, explained in 2016: « Network Rail has been unlocking land for development for over a decade, providing space for thousands of homes, while generating income to reinvest back into the railway. » Network Rail supported the delivery of land for over 1,700 homes during the investment period 2009 – 2014, and land for 1,200 new homes has already been delivered in the investment period 2015 – 2020.

In Switzerland, SBB is planning to build 10,000 housing units over the long term, one third of which will be rented at a low rent (20% below market price). These flats will be built on some 30 sites and will remain in the majority of cases the property of the SBB, which could sell them later « at market price », thus obtaining a good capital gain. Is it the aim of a railway company to play the role of property developer? The question divides.

Urban and neighborhood project
However, the option to sell is not always the right solution. « Real estate is not intended to repay debt, » points out Patrice Couchard, general manager of « Stations », in charge of the SNCB’s real estate management. « The strategy is also, and above all, to make better use of what we own. » Indeed, selling to pay off a debt is not always the best solution while today’s rates are at zero. In addition, it sometimes makes more sense to redevelop station areas, offering more value added in terms of rents and retail spaces. It is also a longer term view, whereas selling is more of a short term option, which can only serve to improve the balance sheet for the year.

Neighbourhood planning around railway stations is a controversial issue in Europe. Some municipalities are strict, as in Lille-Europe or Madrid-Chamartin, while others are subject to urban planning confrontations, such as the Midi district in Brussels. Confrontations also arise when we consider accompanying a large station with a shopping centre, as in Paris-Nord or Zurich. Confrontations subsist throughout these projects, when some claim the city for all, suggesting the maintenance of the popular districts, and others who want to raise the socio-economic index around the stations with high-level real estate. In UK, Network Rail is asked to consider the link between development, stations and other rail infrastructure. « In Japan and Hong Kong, and increasingly in London, property is integral to the development of the transport network. There’s been potential to use railway land more productively for years and selling it off isn’t necessarily the best option », said an expert at Financial Times. However, there are still many who believe that the railways must not participated in business in the real estate sector. A mistake!

However, it is well known that the railway is an industrial sector that offers little in the way of returns and has to absorb enormous fixed costs. It is therefore necessary to have other activities that bring in a lot more money. This is what is lacking in Europe, even among private operators, which means that they do not have the liquidity to withstand economic shocks, such as the current pandemic which is destroying income from ticket sales.

Real estate is the key, still crucial, about the financial sustainability of the Japanese railways, that Europe doesn’t know. Every line radiating out of, for example, a city such as Tokyo, serves a particular slice of suburbs. Contrary to European cities, those suburbs compete and the rivalry is fierce. « Originally, building shops and apartments was a device to get people to use the line, » says at Financial Times Yoichi Takahashi, head of transportation planning at the Odakyu Electric Railway. For Japanese railways, this competition between suburban areas is thus strongly linked to the quality of the railways… and their real estate!

It shows in the balance sheets of these companies. « The railway is about one-third of our total sales, » says Fumiaki Shiroishi, director of the railway division at Tokyu, which serves some of Tokyo’s most popular western suburbs. « By name we’re a railway company but that’s just one of our functions. » Another one-third of revenues comes from real estate development along the Tokyu lines, especially at its Shibuya terminus. The final third comes from services to passengers such as supermarkets, convenience stores and hotels. Every station in Japan is a real estate opportunity and many have a shopping mall built above or below them. Integrated rail and property development is standard in Asia to attract residents … who will be future rail customers. None of this in Europe.

The SNCB wants to set up « living stations ». « We define ourselves as urban planners, trying to achieve a real mix of functions, with as many people as possible living and working close to the station, » explains Fabrice Couchard. A concept which is currently being implemented in Mechelen and Liège. But there is still one unknown: you can live near a station and never take the train, because you don’t need it…

In Switzerland, the SBB offers a perfect railway service model, like the ticking of a well-made Swiss clock. « You can live anywhere in Switzerland without a car — every valley, no matter how remote, is accessible by public transport, » says Daniel Müller-Jentsch, senior fellow at Avenir Suisse, a Swiss think-tank. It’s not station shops that make you choose one neighbourhood or village over another. The train has never been the first choice of place to live, quite the contrary! Europeans seem to flee the train, « that thing that’s so noisy » …

But these frequent, comprehensive and flat-rate service loses money. « If you do a full cost-accounting exercise, only 40 per cent of costs are covered by tickets — and tickets are quite expensive, » says Mr Müller-Jentsch. « It is a great system for users but from an economic point of view it is very inefficient and costly » says Ralph Atkins in Zurich. Reducing a part of the remaining 60% of costs through real estate does not seem to be an option in Switzerland, nor elsewhere in Europe. Public operators know that they have guaranteed income from the shareholder state. They therefore have no reason to change the way they operate. It’s thus a tricky politic choice, as much 75% of Swiss journeys do not made by public transport.

Of course, not all of Europe or even Switzerland have the density of Tokyo. But looking for other sources of income could surely fill the financial gap that is widening every day in our railways. For meanwhile, other modes of transport are preparing for the future and could prove to be much cheaper for public finances, while being more efficient and more responsive to the needs of citizens…

28/09/2020 – By Frédéric de Kemmeter – Railway signalling and freelance copywriter
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