The NHS is Europe's richest landowner but often sells itself short when disposing of unwanted property. Seamus Ward reports

Would you like to live in a converted hospital on London's trendy Fulham Road? How about a spacious flat in a refurbished former mental institution in Oxfordshire? Perhaps you use a city-centre car park built on wasteland once owned by the health service? Across the country, NHS assets are being sold off and recycled by eager developers with the blessing of a government committed to re-using brownfield sites. But is the NHS selling itself short?

Certainly that is the view of David Davis, the influential chair of the Commons public accounts committee. He told the Mail on Sunday in June that 'naive' managers were costing the NHS 'billions of pounds of taxpayers' money' by selling property too cheaply.

The National Audit Office has produced evidence that supports his opinion. In March, for example, it estimated that the Royal Brompton Hospital could have made an additional£6.5m on the sale of its North Block site to property developers.

1. Health service managers acknowledge that they are ill equipped to negotiate property sales. But David Jones, of the Association of Health Asset Management, says the NHS is getting better at dealing with such contracts.

'A few years ago if you looked at large, old psychiatric or learning disabilities institutions you would see vast areas of derelict buildings, only one or two operational blocks and apparently nobody doing anything about it, ' he says.

'That has changed, and now the more obvious areas of surplus property have either been disposed of or the NHS has an active strategy to dispose of them. But the NHS has got much further to go to get the maximum performance out of its asset base.'

The size of this asset base is staggering. The NHS is the largest landowner in Europe, with an estate worth£23bn.

English NHS income from the sale of surplus land and buildings more than tripled between 1993-94 and 199899. Much of this disposal was prompted by the move to care in the community, the closure of Victorian mental hospitals and the widespread merger of trusts.

The sales are set to continue, and in these cash-strapped times the NHS needs them to make as much money as possible. The health secretary has surplus land and property worth£1.2bn to sell off over the next five years.

Sales in Scotland totalled£124m between 1993-94 and 1997-98 and it is likely that the Scottish NHS will dispose of at least as much in the next four years. Health authorities and trusts will add to the great sell-off.

Mr Jones says attention has turned away from the large institutions that have outlived their usefulness and towards identifying smaller assets that are not productive. But he admits there is still a gulf between Department of Health policy and action at local level. 'There is a whole section in Estatecode (the estates management manual) about getting the most out of the asset base. But when you get down to the ground, not many people know. It is not a subject that gets to the top of the management agenda.

'There may be top-level interest in rationalising the asset base, but when you get down to the ground there is a knowledge and ability gap.'

Fluctuating property prices The ups and downs of the property market, particularly in London and south-east England, are one reason for the poor record on asset sales. An old mental hospital may not be worth much in a depressed market, but by the time it is converted into luxury flats the housing market could have picked up again and the health service will be judged to have lost millions.

In the case of the Royal Brompton, a conditional deal was negotiated in January 1995 to sell the site to developers Tremerton for£19m, with a clause that would give the trust a share of the profits should the value of the site increase.

Tremerton could not fund the contract and a new deal was negotiated in May 1996, this time in a depressed property market. The new contract was let for£18.8m with no clawback agreement.

The NHS Executive now insists that clawbacks be considered. If a buyer of NHS land or buildings develops the asset and finds it is worth much more than they paid for it, the NHS will receive some of the excess profits. Sales to non-NHS bodies must be at open-market value, but that does not help if the market takes an upswing just as a developer sells on the property.

The introduction of capital charges Capital charges were introduced in the NHS in 1991 to increase awareness of the cost of owning assets. Trusts pay capital charges to the Treasury, which in turn reflects them in the funds it allocates to the DoH. The prices paid by commissioners include an element for capital charges. It was reasoned that trusts would sell off unnecessary assets in order to reduce their capital charges and their prices.

Yet capital charges seem to have had little effect. Mr Jones says it is not uncommon to find that most building space in a large teaching hospital is used for non-clinical purposes. There is no incentive to rectify that imbalance, he says. Many boards view capital charges as circular cash for which they will receive funding. But if the money was released from capital charges it could be used elsewhere in the NHS to fund capital spending or direct patient care.

'I know of one large hospital which has a large number of old workshops in a prime part of the site that are sitting empty most of the time. They are in poor repair and cover a large area. But the management team does not seem to recognise that this is an issue, ' Mr Jones adds.

Trusts are spending huge sums supporting assets they do not need. 'An average trust spends 20 per cent of its annual income supporting its asset base, through things like capital charges and maintenance. If you have a£100m-ayear trust, it will spend£20m supporting its land, buildings and equipment.

'If 50 per cent of that is non-clinical, that's£10m spent supporting assets that do not directly contribute to patient care. One then has to make a judgement on what proportion of that is absolutely essential. If 50 per cent is essential you are still in the position of spending millions of pounds each year on non-essential assets.'

In a report on the Scottish NHS estate this year, the NAO found that capital charges often did not provide sufficient incentive to dispose of surplus property.

2. For example, Hairmyres and Stonehouse Hospitals trust had derelict land worth around£4m on the open market which it did not declare as surplus. The trust bears an annual capital charge on the land of£22,000, but there was no incentive to dispose of it because the trust would not necessarily have kept the proceeds.

Other trusts have phased disposals, slowing down the release of the money into the NHS. West Glasgow Hospitals University trust sold an office block to Glasgow University in 1997 for£2.79m. But payments are being phased over six years because the trust was only allowed to retain£500,000 a year in capital receipts.

Holding on to the money There are rules about returning capital receipts to regional offices, but trusts can get around them. As one finance director puts it: 'The reality is, it depends on what you propose to do with the money.' If a trust sells one property to raise the cash to redevelop another, it will probably be able to hold on to the cash. But this is unlikely if it sells assets with no plan for using the money it raises.

Occasionally, a region will ask for the money if its capital programme is in dire straits, but a trust with a good case for re-using the funds is likely to keep it.

The impact of the private finance initiative NHS income from land sales has increased steadily throughout the 1990s, but it has fallen in the last two years as surplus assets have been bundled into private finance initiative deals. Receipts from the sale of assets have been used to reduce the cost of projects, bringing down the repayments the NHS makes to its partner consortium.

But although University College London Hospitals trust is about to launch the biggest land sale in the history of the NHS as part of a£160m PFI deal, a recent NHS Executive circular makes it more difficult to include surplus land in future PFI contracts.

3. The circular says: 'Surplus land should only be considered for inclusion within a PFI test if the regional office considers that the alternative of conventional sale and reinvestment of the proceeds in another scheme that has not secured private finance would not command a higher priority. Consideration should be given to whether inclusion of any surplus land would facilitate achievement of other national/local priorities and objectives.'

This will be welcomed by many critics of PFI. John Lister, information director of pressure group London Health Emergency, says selling off land and buildings as part of PFI deals was a mistake.

'If a hospital is no longer being used as a hospital or there is genuinely surplus land, I don't have any objection to it being recycled as long as the asset is still in the NHS. There appear to be a few examples, such as Dartford and Gravesham, where the headline cost of a PFI deal has been artificially lowered because of land changing hands. The value of the land should be taken into account in the overall cost of the deal.'

The sale of NHS property is helping to make PFI affordable, but it also means that the service will have a smaller asset base to call on should it need to raise capital.

'It is ironic that this land is only available because a previous government believed it was a public responsibility to make that investment. You can flog off your silverware only once, and if your requirements then change you have nothing to play with, ' Mr Lister adds.

Legal obstacles As well as financial considerations, there are legal hurdles to jump before an asset is sold. Marisa Broadhurst, head of health property at solicitors Beachcroft Wansboroughs, says NHS bodies often do not know that they can be obliged to sell land or property back to the original owner.

This is known as the Crichel Down rule. Essentially, if land that is now deemed surplus to requirements was acquired through compulsory purchase or the threat of compulsory purchase, the NHS may have to offer it back to the original owner.

Though managers may not be expected to know the Crichel Down rule, they often forget or ignore regulations that they might be expected to be aware of , such as their delegated powers.

'I ask if the officer instructing us is the appropriate officer, ' Ms Broadhurst says. 'Do they have the required delegated authority?'

Legal requirements slow down the process and are sometimes given little attention. In law, other HAs and trusts are priority purchasers and must be given first refusal on an NHS asset put up for sale. But the need to generate cash can mean this requirement is fudged. 'NHS bodies first have to offer the asset for alternative health uses. Sometimes clients forget this, particularly if they are in a rush to get the money in a particular financial year, ' Ms Broadhurst adds.

NHS capital receipts (England)

Year Income (£)

1993/94 37m

1994/95 50m

1995/96 72m

1996/97 116m

1997/98 206m

1998/99 135m

1999/00 123m

2000/01 213m

2001/02 226m

Source: Department of Health spending plans

1999-00 Overage and underage: Dartford and Gravesham Hospital Land sales form a key part of the£177m private finance initiative contract that will see a new Dartford and Gravesham Hospital next year.

Like many PFI deals, the trust is replacing a number of old units in need of maintenance with a new hospital. This has freed land and buildings to be sold to private developers.

At Dartford, three sites have been sold, raising at least£21.9m. A science park, new homes and possibly a supermarket will be built in place of the old hospitals. If retail giant Asda gets planning permission for a new outlet, the trust may receive up to an extra£6.5m.

The National Audit Office, in its study of the PFI deal, commended the trust for obtaining this clawback, known as 'overage', and for obtaining open-market value for the sites.

4. But in some circumstances building contractor Tarmac would not have to share additional profits with the trust - for example, if it was awarded the contract to build the proposed new supermarket.

The trust attempted to negotiate wider overage agreements but was unable to do so.

For example, Dartford borough council, which paid£10.4m for the Joyce Green Hospital site, did not have the legal powers to enter into such an agreement.

If for some reason the Joyce Green site cannot be developed - for example, if it becomes too polluted - the trust will have to pay back£7.4m.

The NHS Executive has since cautioned trusts against making such 'underage' agreements.

Site for scandal: Scotton Banks The inquiry into the notorious Yorkshire regional health authority affair in 1996 examined the sale of land at Scotton Banks Hospital and found areas for concern.

5. Under the deal, the RHA would act in partnership with a developer and then share the profits. But the district auditor felt the authority's officers had exceeded their powers in agreeing the deal, particularly since it differed from the proposals endorsed by the RHA in June 1990.

The district auditor singled out the fact that the partner changed from a consortium to a shell company with no assets, which the auditor believed shifted all the risk to the RHA. He also said the district valuer should have been involved since the expected receipts were over£5m. While the officers acted in good faith, the district auditor estimated that an extra£3m could have been generated from the sale.

The NHS Executive has since beefed up the aspects of the standing financial instructions that deal with powers of delegation to ensure that deals must be reconsidered if there are changes in the terms.


1 National Audit Office. NHS Executive: Royal Brompton Hospital - sale of the North Block site . NAO, 1999.

2 NAO. The NHS in Scotland: making the most of the estate . NAO, 1999.

3 Reeves C. Land and buildings in PFI deals. HSC 1999/022 . NHS Executive, 1999.

4 NAO. The PFI Contract for the New Dartford and Gravesham Hospital. NAO, 1999.

5 Reeves C. Inquiry commissioned by the NHS chief executive into matters raised by the district auditor concerning the former Yorkshire regional health authority. NAO, 1996