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Big Business

15 March 2006

In just two decades, the facilities management and support services sector have become a major driving force in the economy. Nicki Thomson reviews the options for investors in the business potential of facilities management

The contribution made by well-managed accommodation in promoting efficient business operations is now well recognised. However, the role of the facilities management in facilitating optimum business performance is less well understood. Today, the facilities managers role is expected to cover a range of complex and challenging roles, often across entire estates. There’s a raft of legal compliance, strategic policies, best practice information and tactical decision making the facilities management has to embrace to ensure the safe, efficient and cost-effective running of any facilities function. Defining the ‘new’ industry of FM has proved to be something of a conundrum as the discipline crosses so many hitherto defined markets, technologies and processes. IFMA and BIFM define facilities management as “a profession that encompasses multiple disciplines to ensure functionality of the work environment by integrating people, place, process and technology.” NHS Estates chose “the practice of coordinating the physical workplace with the people and work of an organisation.”

Now, Asset Skills has stepped in, issuing both a definition and, with the BIFM, proposing a new SIC code, which is a welcome development. The definition “Facilities management is located in the Support Services Sector of the UK economy and is the efficient integration of support activities within the business environment which is essential to the successful performance of any organisation” is refreshingly concise and to the point.

When it comes into effect in 2007/8, the proposed SIC Code – 81.10 Combined facilities support activities, will include “the advice, professional management, and delivery of combined facilities support activities, and the provision of operating staff to perform a combination of support services within a client’s facilities. Units classified here typically provide a combination of services which include but are not limited to estate management, cleaning, maintenance and energy management, waste management, security, mail, reception, laundry and related services to support operations within facilities. These units are not responsible for the core business or activities of the client.”

It’s important to note this class excludes “provision of only one of the support services (e.g. general interior cleaning services); in-house provision of management and operating staff for the operation of an organisation’s establishment (e.g. hotel, restaurant, mine, hospital); provision of on-site management and operation of a client’s computer systems and/or data processing facilities; and operation of correctional facilities on a contract/fee basis.”

Until now, putting a value on the size of the ‘market has proved difficult. However, in 2003, the Department of Trade and Industry stuck a stake in the ground with a sector report decreeing the facilities management value chain to be worth £200bn, or 9 per cent of GDP. Whatever one’s view of FM, that’s pretty impressive stuff. The DTI further broke the sector down into design (nearly £13bn), construction (£80bn) and operation (£107bn). The facilitiesmanagement market itself was valued at £96bn per annum, a sum covering such areas as catering, cleaning, mail, maintenance, M&E, security, property, reception, infrastructure, furnishings, furniture, etc.

Meanwhile, a report from Market & Business Development (MBD) late in 2005 predicted that from 2006-2010 the annual growth is expected to be 2-3 per cent in real terms. The increase overall in the potential market is forecast to increase by 15 per cent in real terms due in part to growing PPP and PFI activity and the continuing trend towards outsourcing non-core activities.

According to MBD, the FM market is currently calculated to be worth £106.3bn, which is 25 per cent more than when MBD computed values in 2001. The Total FM sector is expected to show the strongest growth over the next five years – taking up some 9 per cent of the market by 2010, and 30 per cent in value terms. Meanwhile the value of contracted out ancillary services is estimated to nudge £75.5bn in the same timeframe, which is an overall increase of 21 percent in real terms compared to 2005. The investment/banking sector is one of the dynamic sectors.

Whether one agrees with the figures is irrelevant – the point to be made is that FM is a big, growing and important sector that’s concerned with people, processes and partnership, something that is now to be endorsed through an SIC code. Over the past two decades, the market saw the emergence of support services/facilities management out of construction companies into a business sector in its own right.

Looking back to the 1980s, TUPE was enacted in 1981, the first facilities management companies started to appear in 1985 and the first corporate management buy outs in 1987. Mergers and acquisitions began in 1990. Moving into the 1990s, PFI (Private Finance Initiative) launched in 1992 a year which also saw the emergence of total facilities management with risk transfer. PFI projects came on stream in 1995 while the global consolidation of suppliers became visible in 1996. In 2000, property portfolio asset transfer deals began to emerge as did international portfolio projects. PPP (Public/Private Partnership) was launched in 2001.

After a slow start, PFI has been undergoing what’s been described as a golden age. New funds have been entering the market looking to acquire existing investments.The launch of such funds demonstrated the deepening maturity of the primary PFI market, and the desire of some market participants to exit their investments once they had reached operational status. Over £500m of equity was said to be available seeking target investments. The emergence of a secondary market in PFI projects is now only a few years old.

These PFI secondary markets have been proving lucrative for companies keen to recycle their capital. Figures show stakes are being sold at twice the initial investment in a project. There is comment in certain quarters that 2005 saw a continuation of trends underpinning the creation of a more vigorous and internationalised PFI/PPP market.

Simultaneously, unprecedented institutional interest in the infrastructure sector from many sources has seen increased activity by secondary funds targeted to the PFI sector and formation of a number of new infrastructure funds targeting both primary development and secondary market opportunities. Many expect these trends to continue through 2006 in an environment of sustained government demand for infrastructure and public service investment.

Secondary market
Opportunities have existed in the secondary PFI market since its early days. However, the market expanded recently with the increase in the number of PFI projects that have started operating. That’s good news for new and existing investors. For investors entering secondary PFI, key benefits are their investment will start paying returns immediately and no construction risk needs to be taken on. However, that reduction in risk will also mean reduced returns. The considered opinion is that PFI entrants may prefer to buy investments in the secondary market, as well as tendering for concessions in the primary market. Such a strategy should enable exposure to be gained to the market quickly, while simultaneously offering the possibility of higher long-term returns.

For existing investors, key benefits include more realistic valuations and new exit opportunities. According to key auditors and PFI specialists, many investors have felt their parent company’s share price did not adequately reflect the value of their FI investments. An efficiety secondary market should reveal the true value of PFI investments more clearly, something which may help support the share price of PFI contractors and investors.

Smaller deals tend to be minority shareholders selling either to a majority shareholder or to external investors. Construction contractors sometimes use this route when they want to leave a project after their active role has ceased. Larger transactions usually involve the sale of the whole equity investment. Competition between potential bidders should help produce higher valuations than on the small deals between existing shareholders. Transactions can also come to market because the owner wants to sell for strategic reasons; the assets are underperforming; or the owner wants to generate seed capital for reinvesting in new PFI concessions. Some will seek to generate funds for investing in new PFI projects by the sale of existing investments.

Sometimes a whole portfolio of PFI investments can come up for sale. This may be because of a strategic decision to leave the PFI market. Alternatively, financial realities can force a sale. But it is vital the sale of an investment is properly managed as an ideal sale should attract interest from several investors.

With certain deals, for example, buyers could include investment funds specialising in the secondary PFI market, attracted by the longdated nature of PFI investments and their predictable cash flows. Whatever happens in the market however, investors must seek proper advice on valuations before buying or selling a PFI contract.

Looking ahead to the coming two decades, many investors will be considering the environmental concerns of facilities managers and the facilities management industry supplying their needs. The key issues the support services/facilities management sector will be embracing will include sustainability and climate change. There is compelling scientific evidence the climate is changing and it is probable that average temperatures will increase by several degrees over the coming century. These increases in temperature are expected to have a major impact on the indoor environment, especially since even today, many buildings are unable to cope with hot summer weather. PFI/PPP and sustainable building projects should make ideal bedfellows, and it is a sector that could become established in the coming years.

However, defining sustainability is like defining what is meant by facilities management. There are over 300 definitions of sustainability and some 130 websites proffering information on sustainability for facilities management. The most-widely used definition is one originating in 1987: “Development that meets the needs of the present without compromising the ability of future generations to meet their own needs.” There is no standard sustainability metric or tool available for FMs yet, but it’s being looked at. Facilities b management has a key role to play in corporate responsibility.

The investment/banking sector with PFI could be in the leading group through involving FMs in the earliest stages of sustainable building design, and designing out the costs of maintenance and reflecting whole life costing. The role of the facilities management in facilitating optimum business performance will in the future move to embracing the way in which buildings and estates are occupied and managed. The future looks bright for FM.

Nicki Thomson is Relationship Director, Business Services at Barclays
07775 546928
07775 544339

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