NovaLoca Blog

The system of paying rent on a quarterly basis is “archaic”, says the Liverpool Daily Post in a Viewpoint column published today. And recent case law is forcing administrators to shut up shop instead of fighting for struggling businesses, it argues.

The paper notes that Topshop boss Sir Philip Green has been lobbying the government for a change to the system, and says that many retailers are currently in the process of negotiating with landlords to switch to monthly rent payments in a bid to bolster cash flow.

But last week the British Retail Consortium said it had carried out a survey showing that only 12% of retail property leases were currently on monthly rental terms, and nearly 90% of respondents who had been allowed to move to monthly terms said they had been, or would be, penalised with higher charges. The retailers organisation says it has always argued that quarterly rental terms are wrong in principle.

“As we pass the March rent deadline, when commercial tenants count every penny, there is a strong argument for allowing more flexibility in the law,” the Liverpool Daily Post says.

The newspaper says that the case of Goldacre v Nortel Networks UK has created a rigid and unhelpful regime under which administrators must operate – “one which ultimately doesn’t serve landlords or their tenants involved in an administration.”

In January, the LDP says, the High Court held that where an administrator uses leasehold premises for the benefit of creditors, the rent which relates to the period of use will automatically be payable as an expense of the administration. Even if only part of the leased premises is in use, the rent for the entire premises must be paid, with no option to apportion the rent to reflect the proportion actually in use.

“In short, if the rent falls due on your watch, you have to pay the entire obligation for the next quarter,” it adds.

Although on paper it sounds like a good deal for landlords – and, indeed, the decision has been hailed as putting landlords in a stronger position – it has encouraged administrators to simply close down businesses, rather than take that risk. The newspaper argues that this can have an adverse effect on the landlord, who now has no tenant and an ongoing liability to pay rates.

In some cases, administrators are simply delaying taking on an appointment, in order to take them past that quarterly rent date, the LDP says. “This is time that could have been spent trying to save the business, and leaves the cash-strapped business vulnerable to hostile creditor action such as winding-up,” it points out.

The Financial Services Authority has “underestimated” the extent of the problems facing the commercial property sector with regard to lending, says primary and special servicer Hatfield Philips.

The FSA’s Financial Risk Outlook 2010, published earlier this month, does not “stress the real severity of the issues faced by the banks”. Hatfield Philips also warns that the government’s desire to force UK banks to lend more may not be realisable until the economy recovers.

Stewart Hotston, director of compliance and reporting at Hatfield Philips, said: “The problems facing the commercial property market are severe. The questions facing lenders are not simply about lending more debt but whether they can afford to lend, whether the market can sustain more debt and just how quickly the economy will recover.”

“Successfully emerging from this recession will need a more considered approach and should demonstrate that both balance sheet lenders and the CMBS market are managing their way through the problem.”

During the economic downturn, approximately 15% of physical regeneration projects involving the private sector have stalled or slowed because developers are struggling to get finance or because of concerns about future yields. So says a report from the National Audit Office, released today, that criticises the way in which the eight Regional Development Agencies in England outside London have invested a combined £5bn since 1999.

Amyas Morse, head of the NAO, said that while the RDAs’ efforts had delivered real benefits, “it is questionable, however, whether they could not have achieved even greater benefits from the £5bn they have committed. It is important that the RDAs establish better appraisal and evaluation methods to identify the projects which are most beneficial and then target their funding accordingly.”

It has been noted that the future of the RDAs is uncertain ahead of the forthcoming General Election, because while Labour has pledged to support them, the Conservatives have said that they would seek to abolish them.

Investors in the UK retail market will have opportunities in all subsectors in 2010 as the rebound in the market is expected to maintain momentum throughout the first half of the year, says CB Richard Ellis.

The group’s executive director for retail investment, Steward Colderick, says that while retailers will continue to face challenges as the UK economy limps out of recession, “we are witnessing unprecedented levels of investor demand and a market that creates a huge opportunity for the informed investor”.

Investors should look beyond headline pricing and fully understand what is at the heart of it all – the retailer and their requirements, he adds. Colderick says that with the retail sector leading the recovery in investment markets, CBRE predicts total property returns in the mid-teens for 2010, with retail forecasts predicted to perform somewhat more strongly.

Out-of-town retail developments will see returns moderate after the exceptional performance during the second half of 2009, but the medium-term outlook is still expected to be “relatively strong” given the sector’s very positive fundamentals, CBRE says. It expects the West end retail market to remain dominated by the demand and supply imbalance that is being compounded by sterling weakness.

Yield compression on the nation’s high streets is set to continue but CBRE expects a greater hardening of yields for secondary assets as investors see greater value here, given the relative pricing differential with prime assets. Shopping centre development is at its lowest for 15 years, and performance is expected to vary widely from centre to centre.

Songbird Estates, the majority owner of the Canary Wharf development in London, on Friday announced a return to profit for 2009 as the upturn continued in the market for office space to let in the capital.

The group said its rental income for the year had risen 10.7% to £318.4m and the value of its portfolio had grown by 7.6% to £5bn in the six months to the end of December 2009.

Songbird, which underwent a restructuring last year, reported strong increases in yield on both its office and retail portfolios. It said the improved valuations reflected its high-quality letting profile, long average unexpired office lease terms with upwards-only rent provisions, and its ability to provide flexible space to meet the demands of a diverse tenant base with varying requirements for floor space.

Despite the crisis in the financial services industry, the group’s portfolio was still 96.2% let at the end of last year. The group also said it had maintained a high level of retail occupancy on its estate and continuing healthy footfall.

Songbird said the Canary Wharf Group was “well placed to meet the future anticipated demand for good quality large floor plates with readily available high specification space and adequate financial resources to undertake projects both on the estate and elsewhere in London.”

Shortages of prime industrial space could mean that speculative development restarts in some areas of the UK as soon as the end of 2010, says Lambert Smith Hampton in new research published today.

LSH’s National Industrial and Distribution Report 2010 says that there were early signs of recovery in the occupational market during the second half of 2009 as take-up rose 10% from the previous year’s level. Take-up was dominated by large deals, with industrial units above 100,000 sq ft accounting for 23% of all industrial transactions.

“Looking ahead, take-up is expected to improve further as the economic recovery gathers momentum – which in certain sectors and areas, where supply of good-quality stock is in short supply, could lead to a rent bounce in the short to medium term,” LSH says.

Michael Alderton, head of LSH’s Industrial and Logistics division, notes: “Our findings are certainly encouraging and we are starting to see real improvements in the industrial sector; however, there is still a huge oversupply of second-hand space in the market as inefficient businesses continue to suffer. This, combined with new space, has pushed overall availability up to 320m sq ft, an increase of 22% on the end-2008 level.”

Demand has come mainly from the retail sector, as major retailers and supermarket chains have continued to refine their supply chains in a very competitive environment. Waste and recycling has also emerged as a major sector demanding industrial space.

The report also highlights the resilience of the industrial investment market in comparison with other sectors, with total return on investment at 3.82%, compared with a 2.18% all-property average.

A report on civil service relocations, released to coincide with yesterday’s Budget, recommended that 15,000 government jobs are moved outside London during the next five years. Some rather timely research from Cushman & Wakefield says that companies can save up to 40% in costs over 10 years by moving out of the capital to the UK’s regional cities.

“As companies remain under pressure to deliver shareholder value and drive down costs, greater emphasis is being placed on cutting both real estate and employment costs with relocation to an alternative location outside of central London now an option for many companies,” Cushman & Wakefield says.

On average, commercial property costs elsewhere in the UK are just 52% of the London level, the research finds. Belfast is the best-value UK location with property costs only 35% of those in London, while Edinburgh is the most expensive of the 14 cities examined, with property costs at 66% of the London level.

The prospect of saving on labour costs is also a key driver for relocation, as these costs form the main component for most organisations. However, Cushman & Wakefield points out that the differential in wages between London and the regions is not as marked as it is for property. The gap between an average manager’s salary in London and the next most expensive cities in the study – Southampton and Reading – is around 18%, while for Cardiff and Belfast, the cities with the lowest average wage figures, the figures are 40% and 45% respectively, it notes.

The company in the analysis is assumed to be a central London occupier with a 50,000 sq ft building employing 500 people, and seeking a similarly sized building with the same headcount in a regional city.

“With the ongoing costs of running a business over 10 years and the cost of relocation, the company moving to Belfast would save £140.9m over ten years in NPV. This falls to £74.2m were it to relocate only as far as Reading,” the report says.

Office business parks are struggling to keep up with the improvement in the commercial property market seen across the UK, says James Petherick at GVA Grimley in Cardiff.

While Central London offices have seen a sharp jump in performance in recent months, office business parks “have been slow to catch onto these first signs of optimism,” reports Wales Online.

“Office occupiers in this area therefore continue to be in a position of strength when negotiating new lease terms,” Petherick notes.

“The outlook overall remains positive for business parks. Take-up has been subdued, but rental decline has slowed significantly. The vacancy rate has risen and is now similar to the post dot-com bubble.”

Petherick goes on to declare: “We’re past the worst of it. The business parks market looks set to gradually strengthen in the short term, despite its slowness to react to improving conditions.”

HSBC has appointed John Herbert to the newly created role of global head of real estate. The banking group said Herbert would be overseeing all its real estate activities globally and helping to drive the creation of a coherent, international real estate strategy.

The Financial Times is speculating that this move could be a sign of the next property trend. Herbert is described by the FT as a 25-year veteran of the sector, having been poached from Citigroup in 2005 by Merrill Lynch, and then becoming an adviser to Advanced Capital, an Italian private equity fund of funds, in 2009.

“Now it’s time to spend HSBC’s money,” the paper adds. Watch this space…

 Just back from the FSB conference in Aberdeen, where we enjoyed really great weather (well, considering we went North not South, it was better than expected…)

I made a good deal of great contacts and even met Lorraine Kelly (as you can see below) – I guess a large number of the businesses searching for commercial property to buy or to let on NovaLoca would benefit from knowing more about the FSB.

Likewise at some time or other most FSB members will have to look for property – listening to stories of members’ property traumas I was reminded why NovaLoca began in the first place… to provide an easy solution for businesses to find a new location, saving them time.

I was also inspired to continue with the quest to make our marketing as effective as possible without costing the earth, as I was faced with the reality of business owners desperate to sell their property before it is seized by the banks and then sold for less than their loans amount to. 

Although I have been an FSB member for some time, I was impressed with the ever-growing number of discounted or free services being offered as part of membership – we must write a blog on them all!

Miranda