Private equity firms, including Guy Hands’ Terra Firma, have emerged as contenders to take over Network Rail’s commercial property business, fuelling further dismay over the forced sale of assets to fund the budget shortfall.

The US investment giant Blackstone is understood to be another bidder for the rail property arm, which includes about 5,500 premises across England and Wales and is estimated to be worth £1.2bn.

According to Sky News, about 20 parties are expected to table preliminary bids on Friday, including Telereal Trillium, owned by the billionaire Pears family, and also funds linked to the Wall Street bank Goldman Sachs.

Much of the property is in urban areas under railway arches, and often let to small businesses such as bars, garages and hairdressers. The portfolio generated a large proportion of Network Rail’s total rental income of £293m in 2017. Network Rail has said existing tenants will retain their leases under the new landlords.

The involvement of Guernsey-based Terra Firma was revealed a month after a scathing report from the National Audit Office found the government had lost up to £4.2bn in a previous sell-off to part of Hands’ private equity group. The Ministry of Defence sold 57,400 army homes for military families for £1.66bn in 1997 to Annington Homes, and then rented them, which the public accounts committee chair, Meg Hillier, described as “a rotten deal for taxpayers”.

Terra Firma has also attracted attention for its management of the crisis-hit Four Seasons Health Care, whose care homes look after 17,000 elderly people in the UK and which is seeking a rescuer.

The sale of Network Rail assets, including some depots but no stations, was agreed as a condition of George Osborne (who was then the chancellor) releasing more funds in 2015 to continue promised infrastructure work. Network Rail hoped to raise £1.8bn towards a £2.5bn shortfall. A host of rail upgrades in a five-year plan from 2014-19 were cancelled after the budget for electrifying the Great Western mainline alone overran by approximately £2bn.

The financier Guy Hands, whose company Terra Firma has emerged as a contender to take over National Rail’s property stock. Photograph: Brendan Mcdermid/Reuters

The shadow transport secretary, Andy McDonald, said: “I regret that the government is forcing Network Rail to sell parts of its property portfolio. It would be much better for the public purse to benefit from the hundreds of millions of pounds of rent from railway arches each year rather than passing this income into the hands of private property investors such as Guy Hands.”

Network Rail declined to comment on the sale, which is being handled by Rothschilds. In announcing the decision to sell in November last year, Mark Carne, Network Rail’s chief executive, said the move would bring more investment into the commercial estate to benefit communities, as well as funding the railway. He said: “I hope to see areas around the railway positively transformed with new and refurbished shops, amenities, and extra facilities for local people and passengers.”

Unions and campaigners condemned the sale. Mick Cash, general secretary of the RMT union, said: “This is the same old bunch of chancers, speculators and asset strippers queuing up to make another killing at the expense of our public services. These property assets make a decent income for Network Rail and once they are gone they are gone, smashing another gaping hole in the rail infrastructure budget.”

Cat Hobbs, of the campaign group We Own It, said: “Railway land belongs to all of us – we don’t want it parcelled up and sold to the highest bidder. This is an asset which generates millions every year, money which should be returned to the public purse not disappear into private profits.”