Details of the proposed scheme emerged after a parliamentary answer last week. In the meantime, management of the properties will be transferred to a Defence Housing Executive.
A price tag of £2bn has been put on the properties, to give an average price of £28,500 a home. But an MoD spokesman suggested this was too high. He said an earlier proposal for transferring property to the Crown Housing Trust had arrived at a figure of £500m.
Savills, the property surveyors asked by the MoD to value the estates, refused to comment on the valuation they had reached.
The favoured scheme at present is for all the property to be transferred into a limited company. This would be backed by a variety of institutional and corporate investors. The company would have strict legal obligations, and the MoD would govern management of the stock.
Institutions could range from investors such as the Prudential, Postel and Coal Board Investment Nominees (CIN), to more specialised residential property trusts, such as Bradford Property Trust, and Artesian Estates.
John Burgess, managing director of Bradford, said NatWest approached his company some months ago but told it the information then available was "too vague" to reach a decision. Bradford expects NatWest to return with firmer proposals.
The transfer of the MoD's 70,000 residential units is surrounded by difficulties. Not least is that many of the properties are in remote parts of the country, are in serious disrepair, or may lose occupants as the MoD cuts back staffing levels.
By contrast, it would also include the homes of Britain's military top brass, featuring fine Georgian rectories and upmarket London flats.
Artesian Estates' finance director, Andrew Moss, said the privatisation could offer interesting opportunities. The company has purchased MoD property previously, in Biggin Hill, Sussex. "But we would want to have the flexibility to add value to any offer," he said. "Simply taking on residential property from the MoD may not appeal."
Likewise, institutions sounded out about the proposals have voiced serious concern over some aspects of any proposed investment. Their main stumbling block is the need for intensive management of the houses if their capital values are to be preserved. This would require the appointment of a management company, which would eat into rental revenues.
NatWest says there are two options on the table at present. Either institutional investors alone would buy equity stakes in the new company. Or NatWest would attract a consortium of bidders to invest in it. This could include property and property management companies, as well as institutional investors.
The transfer to the plc will probably take the shape either of a very long lease, of up to 999 years, or an outright sale. There will be a variety of puts and calls on the properties, to protect investors against the possibility of dwindling occupancy rates.
David Barclay, the NatWest official handling the sale, said a prospectus is some time away. "We first have to design our camel before we are in a position to sell it," he said.
A public flotation is not being considered. There is an outside chance the Defence Housing Executive could come up with sufficient cost savings through its own initiatives to forestall the privatisation process.