Network Rail’s attempts to buy a major shopping centre in Birmingham for £200m are under threat from Government ministers and the industry regulator, which has warned that the business case is “not compelling”.
The state-backed operator of 20,000 miles of Britain’s rail track wants to make its biggest ever retail purchase by taking over Grand Central in Birmingham, which opens next year.
Network Rail is already helping the owner, Birmingham City Council, develop the site, which is a revamp of the existing Palisades shopping centre. This sits on top of Birmingham New Street, one of 19 major stations across the country owned by Network Rail.
New Street is also in the middle of being redeveloped, with new lifts, escalators and improved entrances. The organisation’s directors believe it makes sense to own Grand Central, given the number of train passengers that shop there.
Network Rail is embarking on a new five-year capital spending programme and Grand Central is expected to be a hugely popular shopping centre, anchored by a large John Lewis department store.
But in a letter sent to Network Rail this summer that has been seen by The Independent, Daniel Brown, strategy and policy director at the office of Rail Regulation, said: “Our assessment is that the business case for the acquisition is not compelling.
“Network Rail has chosen not to seek a completely independent valuation in recent months. Nor are we satisfied that Network Rail’s own due diligence process has included robust stress testing of the internal valuation and a comprehensive risk assessment.
“Network Rail needs to invest where it considers that it will make the highest rate of return for that investment. On the basis of the data and models we have seen, the acquisition of the Grand Central shopping centre does not appear to provide sufficient value for money.”
In Network Rail’s latest published board minutes, chief executive Mark Carne added that the Government has “also to be persuaded of the rationale” for the purchase. In order to comply with European accounting rules, Network Rail was reclassified from an independent to a central Government body last month, which means that the Department for Transport has greater control and oversight of its business strategy.
A Network Rail spokesman said: “We believe there is a strong business case. We are the country’s biggest SME landlord with over 7,000 properties nationwide generating over £200m per year, all of which is reinvested into the railway. Our talks continue.”