Under a new Home Office scheme, prisons could be funded by Real Estate Investment Trusts
The public may be able to buy shares in prisons as part of a overhaul of the way they are funded and built, being planned by the government.
A source close to the Home Office has revealed to Building details of the overhaul, which is being planned by the government for next year. These also include a new-build programme to house 4,000 more prisoners and the modification of existing prisons to add a further 4,000 units.
One of the other options being considered is funding the next wave of UK prisons through Real Estate Investments Trusts (REITs), a vehicle that is being introduced in the new year and will allow the public to invest in property.
Under the proposed system, the prison operator would rent the facility from the REIT. The income from this would be channelled back to the investors, which would also include the contractors and the government.
The source said: “The public could buy a share in a prison REIT, taking advantage of the steady rental income.”
The government and contractor could sell on their stakes in the REIT to recover some of the costs of building the prison, in much the same way as secondary PFI stakes are sold on.
However, unlike the PFI prison model, the actual real estate asset would be separated from the services required to run it.
It is likely that prisons would be bundled into packages, like the London Prisons REIT, rather than treated as individual assets.
The idea is at a very early stage but the finance director at the Home Office is set to consider the proposals in the next few weeks.
Regarding the new-build and refurbishment programme, a spokesperson for the Home Office said: “The programme to provide 8,000 new places is still in development and final decisions have not yet been made.”
She added that the government was considering proposals for funding the construction through a number of means.
The source close to the Home Office said the intention was to build three prisons to house about 1,300 inmates each, a shift from the policy of Charles Clarke, home secretary John Reid’s predecessor, who was looking at prisons with a capacity of 600-800.
What is a REIT?
A REIT uses the pooled capital of many investors to buy income-generating property. They offer several benefits over direct ownership of properties: they are granted special tax considerations, are easily traded and there is no minimum investment. REITs pay yields in the form of dividends irrespective of how the shares perform. The first UK REITs will be property companies – for example, Land Securities plans to become one.