National Wealth Service

By Ian Fraser

Sunday Herald

May 16th, 1999

Three prime Edinburgh hospital sites have been snapped up at knockdown prices, writes Ian Fraser

Fancy an old hospital, gov? Cheap at the price! Last few left! These are unlikely to have been exactly the words of Joe Owens, former chief executive of the Royal Infirmary of Edinburgh NHS Trust, when he started selling off a few redundant hospital sites in Edinburgh.

But if you consider that property developer Morrison Construction has picked up three former hospital sites, in desirable areas of Edinburgh — a city in the throes of an unprecedented property boom — at virtually 1996 prices, it must come close.

In what is likely to emerge as a superb deal for shareholders, Morrison paid only £10.86 million for the three sites — the 55-acre City Hospital, in Morningside; the 26-acre Princess Margaret Rose, near Hillend ski slope; and the much smaller Dental & School Hospital in Chambers Street. Had the sites been sold on the open market at 1999 prices, property experts are united in their view that they would have fetched substantially more.

So what went wrong? Has the opacity of the PFI process denied the citizens of Edinburgh the true value of these assets?

Morrison was able to buy the three sites at prices — each of which was independently evaluated by the district valuer and by surveyors Ryden International — on the back of its £225 million private finance initiative (PFI) deal to build and manage the new Royal Infirmary. The functions carried out at the three sites will, over time, be transferred to a monolithic new building, whose steel-girdered frame is rising above Little France.

Morrison’s participation in the winning Consort consortium — whose other members are BICC and the Royal Bank of Scotland — may have given it the whip hand when it came to negotiating to buy the hospitals that had been earmarked for closure.

Even if house prices stabilise or fall between now and the deadlines for medical facilities to be transferred to Little France, Morrison is unlikely to lose money on the deal. In partnership with Economic Development Investment (EDI) a property developer wholly-owned by Edinburgh City Council, Morrison now also seems likely to secure the right to redevelop the final piece in the jigsaw – the Edinburgh Royal Infirmary itself.

The most advanced project is the development of the old Dental Hospital on the corner of Chambers Street and George IV Bridge, opposite the new National Museum of Scotland. Morrison has entered a joint-venture partnership with property developers Burrell to redevelop the vacant six-storey building. The site was acquired by Morrison for £360,000 – about the same as a decent four bedroom house in that part of town. The price was marked down from £500,000 as Morrison required to obtain planning permission and because the building was contaminated with asbestos and mercury. This week, building works start to convert it into 13 flats, which are expected to be sold for between £80,000 and £220,000. In total, they should raise a minimum of £1.7m.

The building’s first floor has been sold as office space to the National Museums of Scotland, while the ground and basement are being rented out as a restaurant. Chesterton, the property consultants, are currently marketing this space to would-be Marco Pierre Whites who fancy premises opposite the swanky new Tower Restaurant – and who can afford rent of £80,000 per year.

Martin Sutherland, senior surveyor at Chestertons, said: “We expect to sign an agreement in six to eight weeks. It’s a realistic rent when you consider that some licensed premises in Edinburgh have annual rentals of over £160,000.” One drawback is that, as part of its attempts to banish cars from downtown Edinburgh, the city council has stipulated that residents will not be allowed parking spaces, not even on the street.

Asked whether he believes the price paid for the site was reasonable, James Forbes, a director of Burrell said: “I was not involved in that negotiation. But, yes, it does seem reasonable.” But George Clarke, chairman of the the Edinburgh Solicitors Property Centre, said: “£360,000 seems like a low price to me. The building is in a prime city centre location, close to the parliament and offers fantastic potential for a mixture of residential, offices, and leisure. There are very few properties of this type available on the open market.”

Morrison will also redevelop the 55-acre City Hospital site on the edge of Morningside in a 50/50 joint venture with Cala homes. The firm’s intention is to build around 400 houses, once the functions carried out at City Hospital are transferred to Little France early next century. Asked if he felt whether a £6.64 million price tag seems a low price for this site — which lies in the south-western fringe of Edinburgh’s posh Morningside district – Roy Durie, public sector partner at Ryden International, replied: “You have to remember they were buying without planning consent.

“Also they will need to do a range of infrastructural work including decontaminating the land, some of the land at City hospital is contaminated with asbestos, and rerouting water pipes. Nearly half the City Hospital site is dedicated woodland.”

However the ESPC argues that the land required to build the sort of dwellings envisaged by Morrison would, in that suburb, be worth around £50,000 per home at today’s market prices. Given Cala/Morrison’s intention to construct 400 houses, this suggests that a sale price of £20 million for the site might have more accurately reflected its market value. ESPC estimates that, between August 1996 and August 1998, Edinburgh house prices rose at an average rate of 18.6%.

However, under the terms of the PFI contract, the price paid will only rise at retail price inflation (RPI) – currently 2.5%-3%. Morrison has also acquired the site of the Princess Margaret Rose, founded as a children’s orthopaedic hospital in 1929, at Frogston Road. Having accquired the 26-acre site for £3.72 million, Morrison intends to construct around 100 homes there. It becomes available for redevelopment in 2003. Four listed buildings on site must be retained: a 1967 lecture theatre block, expected to be converted into a crche; two staff houses; and the main nurses home. Morrison has not yet applied for planning consent, as this expires after three years.

The jewel in Morrison’s crown, however, will be the old Royal Infirmary building and grounds, situated in one of Edinburgh’s most recherche addresses – south of the Castle and overlooking the Meadows.

The site is a palimpsest of healthcare over the centuries. It incorporates a mishmash of buildings, some near derelict, and is laced with shoddy extensions and inappropriate additions in a mix of architectural styles. But its development potential is undeniable. The Infirmary had been finding it hard to adapt this architectural legacy to the needs of 20th century medicine – hence the move to Little France. Its tiled corridors and open plan wards are light and airy, but hark back to the days of Florence Nightingale.

The main buildings, completed through the generosity of the ‘‘great and the good” in 1879, were designed by the architect David Bryce, who was also behind another Edinburgh landmark, Fettes College. Complete with soaring clock tower, they’re typical of the French-influenced Scottish baronial style of the day. Morrison, together with EDI, is understood to be close to securing an agreement to redevelop this key 25-acre site once the first elements become available in 2003.

Together, the two organisations have established a joint venture company, New Lauriston Limited, which is in the process of drawing up plans for appropriate residential development. The Princess Alexandra Eye Pavilion, on an adjacent site will be retained by the NHS as will the 1980s Lauriston Building, which contains the dental institute, orthopaedic, and dermatology. However, the adjacent St Thomas Aquinas School – temporarily closed due to structural problems – will not be integrated with the former hospital site.

Bill Ness, Edinburgh City Council’s head of property, said: “The council is committed to developing a new school on the existing site. The school, which is decanted to two other sites, has just appointed a contractor to carry out works at that site.”

Stephen McBrierty, director of property and construction at Morrison, indicates that the new development will have a “new Century-ish” look, but that key listed elements such as the central clock tower will be retained. A real stumbling block for Morrison however, is the city council’s stipulation that the entire 25-acre site should be totally car free, in keeping with its policy of dissuading residents from using their cars in the city centre.

Property consultants suggest that the council will have to climb down on this matter, taking the view that unless some vehicular access is allowed, the site will be virtually untenable as a development opportunity.

Clearly the Lothian University Hospitals NHS Trust — which took over from the Royal Infirmary of Edinburgh NHS Trust on April 1 1999 — does not want to lay itself bare to allegations of also selling this site on the cheap.

Dr Charles Swainson, acting chief executive of Lothian University Hospitals NHS Trust, said: “We have been negotiating with New Lauriston for the sale of the site, but it has not been concluded.” Should an agreed bid from New Lauriston be accepted, the trust would be open to allegations of favouritism, since EDI is a wholly-owned subsidiary of the city council.

One property expert said: “If I were them, I would not pursue an option agreement or a negotiated deal. Putting it on the open market would be a much better solution.”

Swainson insists that: “The sale of the three hospital sites was competitively tendered as part of the PFI process. The tenders received were consistent with the valuation of the sites by the district valuer, and by the trust’s independent property advisor.

“The prices bid were subject to indexation in relation to the retail price index from 1996 to the date of the sale, the usual index in commercial property sales.”

CATCH UP:
The £225m PFI deal to build a new Edinburgh Royal Infirmary has had an unexpected beneficiary. Morrison Construction has acquired three prime sites in Edinburgh for £10.86m. This week it starts converting the Dental Hospital. Last week, it emerged as front runner to develop the Royal Infirmary itself. Demand for luxury homes in the capital continues unabated. But even if there’s a property slump between now and 2003, Morrison and its partners are unlikely to lose money on these tracts of real estate

Copyright SMG Sunday Newspapers Ltd 1999

Short URL: https://www.ianfraser.org/?p=37

Posted by Ian Fraser on May 16 1999. Filed under Article Library, Investigations. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry