Guest Blog: Overcoming Uncertainty and Risk Aversion after Covid
By Nick Round, head of asset and property management at ESTAMA UK
Covid-19 has affected the commercial property market, as it has affected most industries, with uncertainty and risk aversion becoming widespread. Changes to the commercial property sector have been dramatic, and whilst retail has faced problems for some time, these were accelerated. The number of non-residential property transactions fell 19% to 97,610 in 2020/21 from 120,090 in 2019/20. However, there are ways for commercial property investors to buck this trend, outperform and maintain a strong portfolio with healthy transaction values.
Successful property transactions are no simple feat and require a detailed understanding of the numerous different factors that affect a property’s value and saleability. This detailed knowledge is even more valuable during the current period due to the challenges and turbulent environment that the commercial property sector has faced. Therefore, it is useful to seek the expertise of an asset manager with direct industry experience to maximise a property’s value for investment purposes, saving time and resources for the investor.
There are several significant factors which will impact the success of a property transaction including, direct negotiation with retailers, a stable cashflow, early engagement during re-gears, and strong relationships.
Direct negotiation with retailers
Securing the best contracts and leases that generate a healthy profit for investors is a skilled process. Whilst good leasing agents are very important and help to assist property owners with leasing their properties to prospective tenants, they must take instruction from their client. Asset managers have the authority and expertise to confirm the deal that can be achieved. Having “hands-on” asset managers helps to expedite the process and bring certainty to the negotiation, something that is imperative given the changing nature of the property market.
Entering direct negotiation with retailers relies on strong relationships between the asset managers and the retailers built over numerous years of working closely together. These relationships contribute to the speed of the deal and are beneficial to both parties, to ensure a return on investment for the property owners and a fair and profitable deal for the retailer. The asset manager through their experience will have insight into the rent the retailer pays at alternative sites and can factor in the annual turnover that the retailer should expect based off their performance elsewhere. Accurate and detailed assessments that factor in this valuable information alongside a direct relationship can help support asset managers to leverage the best deal for its investors. Additionally, working directly with the retailers allows for greater flexibility, more open discussions, and a shorter timeline to conclude terms.
Stability of cashflow
Investors tend to require as much certainty as possible which means that the ability to manage upcoming lease expiries and breaks is fundamental. A good asset manager Will know the lease events coming up over the next 12/18 months which will enable them to be proactive about any potential issues. This could be the likelihood of a tenant leaving which can be mitigated by the early discussion This also provides additional time to undertake any necessary due diligence to find an alternative occupier.
Investing in real estate is all about numbers, with the goal being a high return on investment. Industry knowledge, including expert risk management and forecasting, can help investors to find the most consistent and highest source of revenue whilst mitigating risk and liability, all of which contribute to a successful transaction.
Ensuring early engagement with re-gears
Re-gears involve renegotiating the terms of an existing lease and can be hugely beneficial to investors and occupiers. Whether it be a full lease re-gear or a revision of certain terms, early engagement with tenants to fully understand their priorities can be the difference between achieving a long, reliable lease versus a vacant property.
The outcome of a lease re-gear provides a huge opportunity to reach a mutually beneficial solution for all parties, so it is important to get it right. For the tenant, a lease re-gear can provide certainty for the future of their business, which in turn provides the landlord with the security of regular income from long-term, committed tenants, protecting the investment value.
Lease re-gears have become more common since March 2020 as the arrangements within existing leases may no longer be suitable to the tenant’s business needs for a multitude of reasons. Seeking better lease terms can be a lengthy and complicated process where compromise is often unavoidable, so for this reason collaboration between the landlord and tenant should be encouraged at the early stages. A positive negotiation where communication, transparency and flexibility are valued, should result in good news from an investment standpoint.
In terms of asset management, our approach at ESTAMA UK has always been heavily relationship-based; it is often the cornerstone to any successful negotiation, including high-value exit strategies. Having strong partnerships benefits all parties and has served us particularly well throughout Covid-19, where in the 12 months from March 2020 ESTAMA UK have completed over 150 transactions with combined rental value of c£4m.
A successful property transaction will be backed with in-depth industry experience, asset knowledge, and awareness of where it fits into the national picture, not forgetting an understanding of the regional trends that will affect it. Add to this specific site knowledge and you are one step closer to a highly profitable transaction. All these elements are crucial and, paired with the human approach which fosters strong relationships, you have a powerful combination.