The Ministry of Defence has lost up to £4.2bn through a decision to sell off military housing in 1996, according to a report by the National Audit Office.

The MoD decided to sell more than 55,000 service family homes to Annington Property Limited more than two decades ago in return for £1.66bn in cash upfront.

But an NAO report published on Tuesday found that increases in housing prices over the time since the deal was struck mean the government is between £2.2bn and £4.2bn worse off than it would have been if it had kept them.

And the report says the government now faces a battle to avoid paying billions of pounds to Annington’s private equity fund, managed by the offshore tycoon Guy Hands, in a new negotiation over renting back the estate to accommodate servicemen and women.

Annington Homes, which is managed by Hands’ Guernsey-based Terra Firma group, is expected to demand a huge increase in rent paid by the MOD when the current agreement ends in 2021.

When the MoD’s current discounted rate expires, the MoD and Annington Homes need to reach a new agreement. The NAO warns that the MoD faces “a considerable challenge in gearing up for these negotiations” with billions of pounds at stake. At the moment, the MOD pays £178m a year in rent to Annington. Without the discount, which is currently 58%, the bill would rise by £250m a year. From 2021, the lease will have 175 years to run.

According to the NAO, there is a substantial difference between the MOD’s assessment of future rental costs, and the returns anticipated by Annington.

Last January, the permanent secretary of the Ministry of Defence, Stephen Lovegrove, said he wanted the rent bill to “come down very sharply”. Annington has told investors it expects rents to rise significantly from 2021. Last year, a senior manager at Annington told the Guardian the firm was planning to focus on the private rental sector, which could bring higher returns.

The NAO warned that the MoD needed detailed information about the houses on 511 different sites to negotiate effectively, saying the department “must be ready and able to conduct rent negotiations on an equal footing with Annington” which will require “proper resourcing, accurate information and a robust negotiating strategy”.

It also emphasised that at almost every point in the contract so far, the MoD has lost money. The MoD sold the houses for £1.66bn in 1996, and the Annington estates are now valued at £7.3bn.



The NAO warns that if negotiations with Annington do not go as planned, the Armed Forces will have to develop alternative plans for accommodating thousands of soldiers, and that the “negotiating team cannot wait until 2021 for this information”.

It also warned that under the terms of its lease, if the MOD hands the houses back to Annington it has to ensure the houses are in a suitable condition. The NAO points out that based on an average cost of £11,369 per unit, the bill for handing the properties to Annington would be around £443m.

Amyas Morse, the head of the National Audit Office, said: “The department carried out a sale and leaseback deal almost twenty years ago, based upon pessimistic views of the future growth in property values, but with the mitigating feature that the rents charged to the military families who lived there were restricted for the first twenty years. This has cost the public sector a great deal in capital growth, and it has been a great deal for the landlord.

“In 2021 the period of restricted rents is over. The question is now whether the landlord will get a very large rent increase on top of the very substantial capital gains they have already received.”

James Hopkins, the chief executive of Annington Homes, said: “Under the terms it set when it sold its estate to [the fund] for £1.67bn in 1996, £150m more than the next closest bid, the MoD has benefited from a 58% discount until 2021 on the rent it pays Annington, which has saved it nearly £4bn to date.”

A spokesperson for the MoD said: “We have a team working on renegotiating the deal, and believe that rent prices should continue to fall to secure value for money for taxpayers.”