Achieving And Maintaining A Measured Approach Towards Property Ownership Is Crucial As Market Slowly Moves Forward
10 April 2010In these challenging times for the commercial property owner, refocusing on the core facets of property ownership is crucial to future success. During a period of prolonged growth, many issues were masked by yield contractions across all sectors, which often led to a "laissez-faire" approach to owning property assets; a position facilitated by an over-heated market. Now that the music has stopped, it is those people who are prepared to roll up their sleeves and face the issues head on that will emerge better placed as the market moves forward.
One of the most pressing issues that will prevail during 2010 is the threat to security of tenure posed by failing tenants. At the height of the market, a simple statement of accounts summary may have been sufficient to assess a tenant’s covenant: now we find property professionals commenting on the trading format of retailers and suitability of their offer. Indeed, one of the most threatening practices which has undermined the retail sector in recent times is the corporate tactic known as "prepack administrations" or Corporate Voluntary Arrangements (CVAs).
A CVA is essentially a low-cost form of administration that allows the restructuring of an existing failing company. This may seem reasonable, however, this wholly negative step will leave a legacy across much of the nation’s retail landscape, which will hamper growth and undermine the wider property recovery for a longer period. One can only assume that this will also rest uneasily with retailers who are attempting to trade through the recession. The popularity of this tactic seriously undermines the investment value of any property, and despite transparency rules, it is hard for any property owner to identify those who are genuinely distressed. Over the last two years, I have seen many responsible landlords trying to assist tenants only to have their trust abused and the terms of the original agreement eroded.
With tenants re-pricing themselves in almost all sectors and the continued stranglehold on the availability of credit, it is crucial to maximize opportunities to make individual assets as efficient as they can be. Combining this desire for financial efficiency without sacrificing capital outlay on a property can be a hard line to walk especially against a backdrop of pending lease renewals and reviews or where new tenants are actively being sought. Faced with significant threats, it is important that landlords achieve balance in their approach to property. It is all too easy to suggest that cuts be made across the board in respect of service charges, but at what cost? In a market with high vacancy levels, landlords will have to ensure that their offering presents attractively if they are to be given the best chance of filling voids. This may mean that some short-term re-investment is required, but not necessarily at the sole expense of the landlord.
Property professionals providing advice should be creating opportunities to devolve these costs to tenants, where appropriate for the long-term benefit of the development. A converse approach could perpetuate vacancies as existing tenants consider their options and weaker properties are exited through the aforementioned "prepack" arrangement. It is therefore beneficial to have a realistic business plan for individual assets to deliver on all fronts and to implement that plan involving a team of professionals that can work closely to achieve the respective goals across all disciplines.
As time passes and the market moves towards some degree of normality, perhaps the playing field will level out, although many landlords have experienced distressed tenancies, which have undoubtedly exacerbated the strain on funding arrangements. The only sure way to protect against this is to ensure that when purchasing a property, the asset exhibits sound investment criteria and that acquisitions are priced for risk.
From our perspective, supplying high calibre advice to clients and delivering on lettings, rent reviews and lease renewal that enhance the investment profile of asset whilst also allowing landlords to re-invest in the fabric of properties in order to deliver a higher standard of end product, is vital in these leaner times, and will be key to delivering saleable assets when the economic environment improves.