As appeared in Insider North West March 2024 issue.
For landlords or businesses with commercial property assets, how can they attract tenants to schemes and increase the value of their properties?
When it comes to managing properties, the best approach is a local and personalised approach, according to Les Lang, director at Till Asset Management. He says: “We have large amounts of property in the UK that is managed at arm’s length. Buildings need local expertise and local management, because each site has its own challenges and needs its own strategy.”
He gives the example of Till AM’s asset Exchange Quay, which consists of 360,000 sq ft of grade-A office space at Salford Quays. In order to attract multinational companies as occupiers, Lang says: “We had to reposition it as a Manchester asset. If you’re a chief executive in New York or Paris, you probably haven’t heard of Salford.”
This personalised approach to asset management is echoed by Anna Main, managing director at specialist property consultants Re:volve Real Estate, who says the strategy for each asset is unique and depends on the landlord’s plans for the building. She says: “If it’s short term, then it’s obviously important to keep the existing tenants in and maximise the income short term.
“If it’s a longer term hold, they’re focused on getting income on day one, so we might lower the rent to get the building full and then work on driving those leases and the rent up in the next three to five years, particularly with the market the way it is.”
Lang picks up this point, noting the challenging market conditions in the commercial sector: “It’s a difficult backdrop at the moment – yields have worsened and so the value of offices has gone down, which is a challenge in terms of refinancing so people have to work harder at increasing occupancy and rental levels. It is different in the industrial fields because the yields have gone out but not to the same extent as the office market.”
For industrial assets, Lang says it’s sometimes necessary to “take some pain in the early days”, investing in infrastructure to enhance the value in the long run. “We’re working with a business in Leigh on a refurbished industrial unit who are wanting to dispose of it at some point when they move into new premises.
“We’ve worked with them to improve the sustainability performance of the building to an EPC A. We managed to do it relatively painlessly by making some subtle changes to the way they used energy.”
Main says that retail space is particularly difficult in the current climate: “We’ve got some clients that won’t look at retail at the moment because of the state of the market. It depends on the location, but high-street assets are suffering at the moment.”
Joe Bradbury, Director at GIA Surveyors, says the company focuses on enhancing the value of retail assets; a recent example being a high-street retail building abandoned due to the previous occupier’s administration. He explains: “The property was dilapidated, with outdated features and substantial asbestos-containing materials.
“We did a complete strip-out, external recladding and a reconfiguration of the interior for a more user-friendly layout. This transformation allowed the client to secure a new long-term tenant for the space in a difficult high-street retail market.”
Balancing costs and sustainability
The two main challenges for commercial building owners right now, according to Main, are occupier costs and “constantly changing regulations”. She explains: “Occupier costs are a key consideration when we’re looking at the performance of the building. We’re trying to drive down costs to keep occupiers within the asset. We’re also trying to be proactive and look forward to the incoming EPC [energy performance certificate] regulations. In real estate terms, that will come around quite quickly.”
Millerbrook Property Group worked with Re:volve to strengthen the value of its office and retail assets in Manchester, which totalled 30,000 sq ft of space in the city centre. Head of property at Millerbrook, Glenn Taylor says keeping occupier costs low was key: “Re:volve has been a key partner in managing our property and there has been a dedicated focus on maximising the asset’s potential. This has involved sourcing low occupational
costs and building enhancements like upgraded lighting, to continuously reduce service charges and enhance
overall asset appearance for prospective tenants.”
When it comes to the EPC regulations, Lang says: “We’re trying to do those things early and show any potential tenant or funder that we have a route map to achieving those things before they become obligatory, which I think is very important.” The challenge, he says, is: “How you do it in tenanted buildings and how you do it economically, because it can be very expensive.”
At Exchange Quay, Lang says Till AM has improved EPCs from Cs and Ds to As: “We worked with Mitsubishi – who manufacture air conditioning systems – to work out a way we could do an air conditioning and fresh air system on an individual floor to achieve EPC A. On the back of that, we managed to get that floor let to an American multinational.”
Manchester-based Bridge Properties has also been investing in improving the EPCs of its office developments, and director Paul McCann says it has always focused on repurposing existing buildings. The two main assets for Bridge Properties are Eden Point in Cheadle and Element in Warrington, and the priority with both was getting full occupation, rather than going for record rents.
“We bought Eden Point in 2017, which is 30,000 sq ft, and we did a full refurbishment of that building. We went a little further with Element because it was empty. They’re both about 22 years old, so they’re modern buildings but the M&E [mechanical and electrical services] needed upgrading, and the actual look of them, which was tired and old.
“Eden Point is now an EPC B, because there is still a little of the old air conditioning. Element is a high A because it’s all new with modern air conditioning, brand new lift and new lighting,” McCann says. The focus on improving the energy performance of the buildings was, in part, to “attract the larger companies”, according
to McCann, but he also notes that “even the smaller companies now are trying to achieve sustainable accreditation.”
Another key strategy for building owners looking to reduce energy costs and maximise sustainability benefits is the installation of solar photovoltaic (PV) panels. Bradbury says GIA has introduced a prediction tool for PVs, which helps building owners to understand the usable roof area where panels can be installed, the energy generation potential and the payback period.
Bradbury explains: “Our prediction tool eliminates the need for time-consuming physical site inspections or access, streamlining the scoping and assessment process. It allows us to handle diverse portfolios of assets, such as industrial units, or generate results for expansive city areas.”
The ‘unsung hero’
For long-term assets, keeping on top of maintenance is key to maximising value. For Bradbury, dilapidations and leases are ‘unsung hero’ tools to enhance property value, prevent disputes, and avoid unnecessary costs both throughout and at the lease-term. A good example of this, he says, would be roofs, which often represent the largest liability within a commercial property. “An interim schedule of dilapidations may serve to avoid the complete coating or replacement of the roof sheets within a terminal schedule of dilapidations,” he explains.
This is echoed by Main, who says: “We’re keen on keeping on top of tenants and inspecting regularly. If it’s on a full repairing lease, we would inspect every three months, whereas a lot of the agents would be every six or every 12. If the tenant were to go into administration, the landlord would carry the cost of these repairs.”
She advises however, that it can be tricky to navigate: “Sometimes landlords are reluctant to insist on tenants carrying out repairs – for example, if there is a break clause coming up in the lease, the tenant might just decide to move elsewhere. You’ve got to play your strategies quite carefully depending on what you’re trying to achieve from it.”
Despite challenging market conditions, Main believes now is not the time to ‘fire sell’ and get rid of commercial assets. She says: “I’ve heard from clients about agents saying ‘the market has turned really bad, you should just sell’. To us, that is the worst thing you could advise your client to do at the moment. The market goes in cycles and it’s about implementing these strategies to keep your costs as low as possible and drive the asset, and the market will come back.”