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Safeguarding value

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Owners of commercial and industrial property need to take proactive steps to protect the value of their assets.

Backdropped by key trends like an increasingly sophisticated industrial sector, an ongoing flight-to-quality in the office market, escalating construction costs, and heightened sustainability expectations from occupiers and lenders, landlords must ensure the inherent value of their assets is protected now and into the future.

No one wants to own an effectively stranded asset – a property that fails to meet occupier, investor, lender, or legislative standards and essentially becomes unsaleable and/or unlettable.

While for many building owners that may not be an immediate concern, industry experts say it’s a fast-moving game and astute forward planning can safeguard property values.

New-build stock that meets current physical compliance thresholds, and which is increasingly overlaid with sustainability benefits has intrinsic value for lending and leasing purposes, however existing buildings need to be thoughtfully maintained and managed – and often repositioned in the market – to remain relevant and financially viable.

Refurbishment programmes informed by occupier preferences and environmental, social and governance (ESG) principles, smart leasing strategies, and sound asset/facility management all have their place and across Bayleys’ service lines, the wider team works closely with its clients to optimise a property’s value in today’s marketplace and beyond.

Aligning space with occupier goals

Bayleys national director commercial leasing Matt Lamb says there are several crucial factors to consider when structuring leases to enhance the value of a commercial property asset.

“The length of the initial lease term is pivotal as the longer the term, the lower the risk of vacancy, which ultimately increases the value of that property.

“Additionally, annual rental escalation helps align the rental figure with inflation or market fluctuations and is typically by way of fixed annual percentage increases or tied to the consumer price index (CPI).

“Lease security is also important and is standard market practice, with the lease secured against a bank guarantee or bond.”

Lamb says there’s no room for complacency from landlords, and keeping up-to-date with the latest market trends and maintenance of the property is a given.

“Regular renovations and capital expenditures are necessary to preserve the asset's competitiveness and attractiveness to tenants, as businesses gravitate to quality and prioritise sustainable practices.

“Occupiers want to lease spaces that align with their brand and stakeholder sustainability goals, save on outgoings, enhance employee well-being and productivity, help attract talent, and comply with regulations.

“They value certifications like Green Star, NABERSNZ and Net Zero Buildings, want energy-efficient systems and waste management processes, and place a strong emphasis on amenity to encourage staff into the office.

“It’s inescapable – landlords are having to invest in their properties to improve new building standard (NBS) thresholds, upgrade heating and air-conditioning systems, install LED lighting, improve security and access, modernise common areas and provide quality end-of-trip facilities.”

Lamb says although there are significant upfront costs for landlords to cater to the raised sustainability ethos, the impact on value is very positive, with recent statistics suggesting an increase in rental income of three to 13 percent, enhanced yield return, higher occupancy and retention, and lower OPEX.

To help drive sustainability and reduce emissions footprint, the government has proposed amendments to the Building Act to be phased in from 2024, mandating energy performance ratings on bigger scale commercial, public, and industrial property, along with large multi-level apartments, and requiring a waste minimisation plan before any remediation work is undertaken.

Effective management

Bayleys national director property management services Stuart Bent says as responsible investment gains more prominence, assets demonstrating positive environmental responsibility, management and track record will eventually have a competitive advantage and increased value.

“Bayleys Property Services (BPS) has assisted several local and offshore clients on their sustainable development pathways through key initiatives such as Green Star design and in-use accreditations, NABERSNZ energy efficiency ratings, improved waste management, reduced water consumption and solar panel installation,” he says.

“These initiatives have helped reduce building operating expenses, without compromise to an enjoyable and healthy workplace, and have resulted in improved asset performance, higher net rental and increased capital value.”

Bent says proactive tenant retention strategies are essential in today’s market, and BPS works alongside its clients to identify and implement effective tactics.

“It’s common for competing landlords to court large occupiers and incentivise them with attractive terms to leave their current building and take up alternative space, which can potentially create huge vacancy, loss of rental income and in turn, capital value for the affected building owner.

“Comprehensive and proactive capital expenditure planning beyond the immediate 12 months can have a positive impact on longer-term capital value.

“Detailed lifecycle planning to identify when certain asset equipment may need upgrading to avoid incurring larger, unexpected, and unbudgeted, replacement costs is one example.

“A well-constructed operating expense budget will keep the asset competitive in the market, optimise net income to an owner, and not compromise the overall service delivery and occupancy experience for each tenant.”

It might sound basic, but Bent says having up-to-date documentation such as lease registers and tenancy schedules can make a huge difference to a valuer engaged to assess capital value for an owner, and perception can become reality.

“Poor housekeeping by a building owner creates problems for a valuer, as disclaimers are often then required to account for gaps in record-keeping and lack of clarity around income.

“Likewise, a good track record in compliance and risk management by an owner is crucial as even a publicly-visible expired building warrant of fitness can create nervousness for existing and potential occupiers, and lead to doubts around effective management capability.”

BPS general manager Michael Thornton says good management is central to a well-performing, proven and appealing asset.

“Ensuring rental and OPEX are recovered from tenants on time, any payment defaults dealt with quickly and communicated with the owner as soon as possible, contractors and suppliers paid on time – these are all factors underscoring reliable and ongoing service to an asset.

“Managing lease-critical dates is also key to maintaining and adding value to the asset, and early engagement with both the owner and tenants on upcoming rent reviews and renewals will ensure deals are settled, or alternative leasing strategies put in place, well before lease anniversary dates.

“Additionally, owners should have a well-managed, well-maintained and well-communicated operating cost budget to ensure tenants don’t get any nasty surprises.

“Tenants should always know what their OPEX contribution covers, ensuring they are getting value for money in terms of how the building is maintained and what services are included – happy tenants will provide long-term tenure which de-risks the value of the property.”

BPS national portfolio manager Michael Gillon says innovative management strategies to activate the common areas of office buildings have upside for a landlord as these keep tenants engaged and committed to a building, thereby supporting the ongoing income return.

“With corporate tenants actively encouraging staff back into the office to improve team culture and drive productivity, office buildings can adopt similar initiatives seen in retail environments to entice customers and increase dwell time.

“At Harbour Grounds, an office precinct in Wynyard Quarter which BPS manages and where it has its corporate headquarters, there are numerous events and activations organised by the management team within the common areas from food trucks, live music and market days to sustainability-linked events such as guided e-bike tours and Bokashi composting workshops.

“Providing these types of events and activations contributes towards the ‘earning the commute’ philosophy where, if you’re going to ask people to spend time on busy motorways or public transport to come into the office, you’ve got to make it worthwhile.”

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