The owner of Royal Mail, International Distribution Services, has agreed to sell the UK's 500-year-old postal service to Czech billionaire Daniel Kretinsky in a move that would see one of the country's largest property companies change hands.

The £3.6 billion takeover offer values Royal Mail at £5.3 billion, including debt. It seems logical that Kretinsky and his EP Group have been poring over the potentially billions of pounds in the latent value of Royal Mail's real estate to claw back some of that investment.

IDS said the agreement included a series of "contractual commitments" to protect public service aspects of Royal Mail such as the universal service obligation to "one-price-goes-anywhere" first-class post six days a week.

In a statement supplied to CoStar News the Royal Mail added that the IDS Board has negotiated a series of financial safeguards to prevent the bidder from "extracting value from Royal Mail by, for example, transferring Royal Mail assets (e.g. property, pensions, cash) or granting security or guarantees over its assets".

But it has been widely reported that these safeguards would only be in place for five years.

Columbia Threadneedle Investments, a 5% shareholder in IDS, has immediately said that Kretinsky's current offer of 370p-a-share undervalues the company.

Jeremy Smith, co-head of UK equities at Columbia Threadneedle Investments, a major real estate investor, told The Times: “We believe that the management team has done a good job to turn the company around and additional equity value can be delivered over time for long-term shareholders.”

The Times adds that there is concern among investors that the "operational benefits of a recent agreement between Royal Mail and the Communication Workers Union, possible regulatory reforms to the so-called universal service obligation and a workforce pension scheme surplus and property estate have not been fully valued".

The EP Group's offer includes confirmation that it will keep the Royal Mail name and brand, and says the postal service will retain its UK headquarters and tax residency, to keep it linked to Britain. EP would be the first foreign owner of a company that dates back to 1516 and Henry VIII, who first hired a "Master of Posts".

Shareholders will vote on the deal at IDS's next annual general meeting in September.

But what property does Royal Mail own and how much of it could Kretinsky sell?

Getting to the bottom of its value is difficult. In its half-year results, at end of September 2023, the value of its property, plant and equipment was reported as £3.259 billion, down slightly over six months from £3.298 billion.

Unravelling that to get a sense of the latent value is more difficult. When the Conservative-Liberal Democrat coalition government privatised and sold Royal Mail to a series of investors in 2013 for £3.3 billion, or 330p a share, it was criticised for undervaluing the real estate. A highly critical National Audit Office report later slated the Department for Business, Innovation and Skills for being too cautious when setting the sale price.

In 2012, ahead of privatisation, when Royal Mail picked DTZ as its sole strategic real estate adviser the estate had been valued at £2 billion. By then the service had already been pursuing a major consolidation of its operations as it faced up to large drops in the number of people sending post.

It has sought to maximise values from its surplus estate, selling off sites that included major development opportunities in Nine Elms, Rathbone Place and Twickenham in London, as well as Reading in Berkshire. In March 2011, Royal Mail had announced plans to close around half of its 64 distribution centres by 2016.

According to its website, Royal Mail Property & Facilities Solutions is now responsible for maintaining and upgrading one of the largest corporate real estate portfolios in Europe, with over 2,600 sites. It says it works to the "highest standards to ensure that our buildings follow legal and industrial regulations and that they are safe at all times".

In 2019, confirming it had secured a five-year mandate, with an option of two further years, to continue acting as strategic real estate adviser Cushman & Wakefield (formerly DTZ) said the Royal Mail’s UK estate comprised almost 32.3 million square feet across over 1,800 sites.

It is understood roughly half of this is owned freehold by the Royal Mail.

The most attractive element for Kretinsky and his EP Group, which did not respond to a request for information on early plans for the real estate, are likely be the fact that Royal Mail's delivery centres are industrial premises based in, or very close, to the centre of the UK's conurbations. The buildings are located on the sort of prime sites highly prized by the last-mile distribution sector, and it is for this reason that they could be dramatically undervalued.

Royal Mail has been a busy manager of this portfolio for years. As it responded to a landscape where letter sending has vastly reduced but parcel delivery has hugely increased, it has relocated from some older sites into new-format, modernised hubs, freeing up prime development opportunities for sale, and the prices attained have been huge.

Royal Mail sold its Rathbone Place 2.3-acre Post Office site in London's West End to GPE in 2011 for £120 million, then leased it back as a sorting office before leaving two years later. GPE sold the redeveloped site to Deka in 2017 for £435 million.

It also drew up a masterplan to carve up a major vacated delivery centre site in Nine Elms in London into eight plots and subsequently sold on the plots to different residential developers. It sold one to Galliard Homes for £22.2 million for development as 262 homes and another plot to real estate companies Henderson Park and Greystar for £101 million, for redevelopment as an 894-home Build to Rent scheme.

At present Royal Mail and its larger parcels delivery arm Parcelforce Worldwide are marketing for sale Royal College Place, a major development site in King’s Cross in central London via CBRE ahead of a relocation to Tottenham.

It has also formed innovative partnerships with companies to focus on where there is scope for storage, for instance agreeing to deliver all mail to British Gas customers and parts and equipment to engineers, and with rival online delivery companies such as Amazon on click-and-collect delivery services.

It also continually evaluates its property to see which buildings are most important to communities for delivery. One property expert, who declined to be quoted on the record, said: "They evaluate the necessity of particular properties for their communities all of the time and do not just vacate if it is run down."

The group cannot compromise the integrity of the mail by integrating other occupiers, which means it is limited in terms of marketing vacant floors at centres.

EP's options with the real estate will also be limited by the fact that some sites are shared with the Post Office, the postal service retail branch network, which remains government-owned.

The current state of the property market is also a factor. In an Ofcom report last year, Royal Mail reported its target is to offset in-year trading cash outflows with proceeds from real estate disposals in 2023-24 to improve the cash position of Royal Mail. But this is "increasingly under strain as wider external market factors have resulted in a less favourable property market".

It added: "We are forecasting a further substantial loss in 2023-24 on top of the loss incurred in 2022-23. We announced in May 2023 our intention to dispose of a property in Royal College Street in London to generate proceeds to support our cash position. "