Using lease events to maximise value 

by Rory Newsome, Divisional Director - Landlord and Tenant
T: +44 (0)20 7544 2043 or E: rnewsome@nbrealestate.co.uk  

The rise of the tenant

The property market is in shock. Not only have yields and valuations fallen, but the whole balance of the business has changed. The stability assured by secure tenants in long term leases seems a distant memory as uncertainty rules and businesses fail.

In a buyer’s market, tenants have the upper hand; they can call the shots. Of course, with change comes opportunity and this is just as true in the property business as in any other. So what should you be doing today to identify and take advantage of opportunities to restore and maintain the value of your property portfolio?

Conflicting objectives

Let’s take a look at the tenant. Almost without exception, they are struggling to see their way forward, and that means control of overheads and cost re-engineering: cash is the driving imperative. Emphasis is on short term survival rather than long term planning. It’s here that we see the greatest conflict between the needs of the landlord and those of the tenant.

The table below exposes the opposing needs of landlords and tenants.

Landlord bias	Tenant bias
Long term lease	Short term lease
Urgency of lease renewal	Play the waiting game
High cost to attract new tenant	Incentives to relocate
Lease events are potentially risky	Lease events are potential opportunities
Security of tenure	Freedom and agility
Predictable, sustainable rent increases	Rent reductions

Conflicting objectives aren’t a new phenomenon in this business, but the rise in tenant power means they can have a significant effect on the two key business objectives; namely yield and valuation. You just cannot ignore this situation; you need a strategy and an approach that can turn the situation to your advantage.

Focus on the customer

In any business, customers are key assets and commercial success lies in understanding their needs and aspirations. Retailers go to great lengths to collect information about buying patterns and preferences. Service providers build relationships often using a “land and expand” approach where they establish a beachhead in an account and then build relationships through networking and client recommendations. The key elements here are knowledge and relationships. The better the relationship, the more knowledge they gain. Successful organisations are creative in the way they exploit that knowledge to sell more products and services.

Landlords can use a similar approach. It’s time to start treating tenants as customers; courting them in order to build relationships and to better understand their needs and aspirations. Get it right and you can regain some control. Fail to act and you will leave yourself open to your competition, and the competition is in training!

Building the right deal

Relationships are only part of the story. It’s one thing to delight your tenant, but how will that help improve your financial position? If you “give away the shop”, how can that have a positive effect? Clearly that is not a sustainable strategy, but investors do need to be realistic when assessing the current business position.

While the landlord and tenant relationship continues to change into a courtship, landlords must also be careful about who their tenants are.  As a responsible landlord, have you done your research and performed a health check on your tenants?  Is their covenant strong enough to give you confidence, or will they go bust and leave you with vacant space? 

Flexibility and creativity are key considerations. Take the case where a lease renewal is due. The tenant is playing a waiting game and will not be coerced into action. They know a falling market when they see one; as each day passes their position improves. Such inertia will reduce the value of your portfolio and therefore adversely affect fund performance. It is in the landlord’s interest to get some impetus into the proceedings.

A deep understanding of the tenant’s needs is an essential ingredient when tailoring a deal that will best accommodate both parties. A flexible approach may be to build some forward pricing into the frame; acknowledging the inevitable future devaluation in an attempt to secure commitment from the tenant; constructing tomorrow’s deal – today.

Perhaps some movement on the surrender clause may sweeten the deal? Or maybe a release on part of the building to accommodate the reduced headcount that’s forecasted? There are a range of options to tempt the tenant. The more you understand the customer, the better placed you will be to construct the appropriate deal. But you need to be ahead of the game; if you want action, you’d better be in the driving seat.

Of course, you need to have a view of the effect any concessions may have on valuation and yield. There needs to be a balance in the deal to protect the investment. A rent increase may be on the cards in return for a reduced commitment, or vice versa. Get the deal right and you will satisfy both parties; getting it wrong could exacerbate a risky situation.

Expert advice is fundamental to making the right decision. This is where NB Real Estate will capture value by creating the right deal. We use our experience and creativity to advise and to guide lease renewals and rent reviews, to the benefit of both parties; ensuring continuity of income through customer satisfaction.

So if you want to use lease events to secure income and maximise portfolio valuation and fund performance, why not give me a call. I’m Rory Newsome, Divisional Director - Landlord and Tenant, and you can reach me on +44 (0) 20 7544 2043 or email at rnewsome@nbrealestate.co.uk. I’d be delighted to hear from you.