THE State's return to the market to buy office blocks occupied by the public service has brought it into direct competition with private investors. The new commissioner in the Office of Public Works, Mr Sean Benton, says: "It's not so much a change in policy as a change in the way we're doing our business, having regard to the changing market environment.
The OPW, which holds the State's property portfolio, has marked its return to the office market with the recent purchase of the Bord na Gaeilge offices in Merrion Square and Goldsmith House occupied by the Department of Social Welfare, in Pearse Street, Dublin. It is also buying the headquarters of Bord Iascaigh Mhara in Dun Laoghaire.
Traditionally, the State owned practically all of its buildings and it still owns close to 70 per cent of its office portfolio of about six million square feet. Most of it is in Dublin, with about one million square feet outside the capital. In addition, it has another four million square feet or so in accommodation made up of facilities like laboratories, courts and prisons.
In recent decades, it tended to lease rather than buy or build. But that approach has now been reversed in favour of more purchasing and, where leasing, of trying to introduce more favourable contracts.
"Going back a bit, there was certainly more leasing and it can make sense, depending on the circumstances and the requirements," says Mr Benton. "In a time when the market is on an upward cycle and when interest rates are low and when you have a long-term requirement, building or buying is the best option."
When leasing now, the OPW tries to impose its own lease, replacing 35-year leases with 20-year ones, which carry less onerous conditions for the tenants. The older - and longer - leases were heavily loaded in favour of landlords, Mr Benton believes.
Some made the tenants responsible for full maintenance, repair and all structural damage rather than for just normal wear and tear. Exercising a break clause or the end of the lease meant that the State could be forced to do up the entire building and secure a new gilt-edged tenant from whom the landlord could then demand higher rent.
"Very long leases with very onerous clauses put almost penal responsibilities on the tenants to repair and maintain and make good any defects and hand it back in an as-was condition. So you can be faced with huge dilapidation claims. You're continuing to pay rent, you're maintaining the building for somebody else and at the end of the lease you have no capital."
Such leases, he says, probably reflected the market at the time - but times change. "We would consider our approach a fair one," he says. "It includes opportunities for breaks in the lease and the usual provisions in relation to rent reviews. We would like to see the rent reviews reflecting the market: in a lot of the older leases the rent reviews would be upward only."
How successful has the OPW been in having its leases accepted? It has met a bit of resistance to them, he smiles.
It is also the OPW's policy to use break clauses in leases to re-evaluate its needs and to use them to end a lease if it makes sense. All the State's leases - covering the next 300 years - are computerised, and the system flags break clauses well in advance.
"Our objective is to break whenever we can in order to seek every opportunity to rationalise our portfolio. Sometimes the accommodation could be sub-standard. Sometimes it could be in the wrong location. All of those issues are reviewed when the break comes up.
"It doesn't mean that in every case we will break, but it means that we set about looking for the opportunity to break, to see whether we can rationalise, whether we can move various bits and pieces around and get a much more cohesive portfolio. The bottom line is we pursue the opportunity at the time. Sometimes it makes sense to stay."
After a period in the late 1980s when the State sold off many of its available sites, its space needs have now bottomed out and the trend is upwards again. Cuts in numbers of public servants and the decentralisation programme led to a surplus of accommodation in Dublin, which has now disappeared.
"At the moment, we have 1,600 square feet of useable vacant space - the size of an average four-bedroom semi-detached house - in a portfolio of 10 million to 11 million square feet," he says. "Some people might say that is extremely efficient management of the property portfolio. I'm not so cure it's a good thing. My own view is that it is highly inefficient to have a lot of vacant space but, I think, to have none is inefficient as well because it means that you have no flexibility."
The decentralisation programme has meant about one million square feet of State offices will be outside Dublin, of which three-quarters has been completed. Major projects are due for completion next year in Waterford (for 250 staff from the Land Registry and the department of Social Welfare); Wexford (centralising 170 staff from local offices); Johnstown (for the Environmental Protection Agency and some Department of Agriculture staff); and Kilkenny (170 more staff due to move there). The OPW is also looking for sites in Dundalk to centralise government offices in the area and in Roscommon for the Registrar of Births, Marriages and Deaths.
The decentralisation programme has been based effectively on a mortgage arrangement whereby developers build the offices to OPW specifications and the State will own them after 20 years. Rents average about £6.50 per square foot, considerably cheaper than in Dublin. Even in Dublin, however, the State is paying well below the market rate at an average of £8.91 a square foot compared with £12 to £15 for the private sector.
Mr Benton attributes the State's lower rents to a number of factors. It is a gilt-edged tenant which is not going to walk away form its liabilities; it is probably the biggest player in this market; and the fit-outs it requires are more functional than are often required by major companies.
On the latter point, Mr Benton says that the State is becoming more conscious of its public image. "Underpinning all of the Strategic Management Initiative in the public service is a philosophy of customer focus and a quality working environment to provide people with an environment which facilitates customer service and also helps them to be productive. Some of our office accommodation couldn't claim to meet those standards. Certainly, a lot of what we've done recently, particularly for departments like the Revenue and Social Welfare, which have a very obvious interaction with the public, reflect the focus that is on delivering quality service to customers."
When it comes to buying buildings, is the State at a disadvantage when people know that it is in the market? "The perception that the State has fairly deep pockets and can be hiked up through sophisticated auctioneering techniques was a problem," he admits. "We're naturally very coy about letting it be known that we're in the market. But this place is a village - people know."
