As a real estate professional and TDA Estates Manager I am often asked about the performance of the estate and how I might add value. I believe this is equally important for both private and public sector managers. As a result I am always looking for the potential to enhance an asset and increase its value. The value of commercial property is primarily driven by the cash flow and rental income the property generates. Key to this is identifying the range of strategies that can be employed, from increasing rental income to reducing operating costs. If an asset is held for more operational reasons then asking whether the assets actually support the business objectives or do they actually hinder them? What are the risks associated with holding particular assets? Does the cost, performance and risks outweigh their value? Are they in the right place and is it worthwhile investing to mitigate those risks?
Below are a series of strategies to consider when looking to enhance the value of a commercial estate.
- Make ImprovementsImprovements can take the form of cosmetic improvements or substantial refurbishments. This is very much dependent upon the budget available. Cosmetic improvements could include repainting the common areas, new flooring and carpets or new landscaping for example. Depending upon the nature and drafting of leases some of the costs could be recoverable from a service charge. More substantial improvements could include new reception areas, overhaul of fixture and fittings, improvements to the toilets and kitchen areas. If you are the owner of a much larger building then you could consider changing the structural faade of the building. The key thing to remember is that any improvements will increase the value of the property, enhancing the experience for tenants and making the asset more desirable.
- Increasing Rental IncomeThe value of all commercial estate is driven by the rental income it derives so being able to increase the rent should be a first consideration. Reviewing the lease history and previous rent review sequences is key to identifying whether tenants are paying market rents or whether a property is under rented. Ask a simple question to understand if there is an opportunity now or in the near future to increase the rent by activating an outstanding rent review? Understand whether it is possible to rentalise improvements you have made to the property that could be used to justify an uplift in rent. I do however think it is important to know the maximum rental levels that could be achieved. If the headline rent for a particular asset group such as offices is 15 per sq. ft. in a particular location then be careful not to spend more on refurbishment of an asset that is never going to be recovered and paid for through a higher rent.
- Decrease ExpensesGoing hand in hand by increasing rental income is also reducing operating expenses. Does a particular building have legacy operating systems that are inefficient? Adding sustainable features such as solar panels or energy saving appliances can lower operating costs. Clearly one also needs to consider the implication of Minimum Energy Efficiency Standards (MEES) which now applies to all new leases. A well maintained building tends to perform well in terms of energy use. Furthermore the level of cleanliness and standard of decoration also has a direct impact on staff moral and satisfaction. Of course the alternative occurs when a property is poorly maintained; levels of disrepair are high when costs of occupation can easily spiral out of control. The costs of occupation of the estate I manage are monitored continuously, so I am able to see re-occurring spikes in expenditure or a gradual increase over time. A simple question I always have in the back of mind is simply how expensive is a building to occupy. This will include understanding the full utility costs, replacement of lifecycle items (furniture and fixtures), IT equipment and rents and rates. Collating this occupational information by building and location helps to give an overall performance review of the portfolio and allow buildings to be ranked and decisions taken on potential disposal.
- Change the Property’s UseClearly if there is a lease and rental income being generated it is not so easy to change the use of a property. However if an asset is approaching the end of its useful life there could be the potential to change the use. What alternatives are possible? Office use to residential use is very popular under current Permitted Development Rights. At the very least it could increase the re-sell potential. The location of a building is also an important factor to consider as experience has shown it can have a huge impact on value and desirability.
- Add amenities and increase the rentable floor areasA final point to consider that is often overlooked is to think about adding amenities so to make a property more appealing to a tenant or occupier. Depending upon the size of the property a good example would be improving the connectivity in a building or adding a gym or caf or creating an outside courtyard for staff to access. If there is space available consider if this could be utilised in a better way and rented out.
When reviewing commercial property look at what strategies could be employed to make a property or portfolio more valuable. Sometimes picking a couple of options can have a big impact on the look and feel of a building. TDA is able to provide advice and support on increasing asset values, building life cycles and improving occupancy levels.
Paul Palmer, TDA Estates Manager, can be contacted on [email protected]