THE recession has cost lives -- the lives of some of the UK's largest
property companies.
''Value for money'' is the current buzz phrase for tenants and
shoppers alike. Because of this, the mid and late 1990s are likely to
witness a glut of discount stores emerging, where keeping running costs
low is a major objective.
There is no doubt that as the recession drags on, it is having a
marked effect on the management of commercial property. One company
rising to this challenge is Erdman Lewis which manages one of the
largest property portfolios in Scotland, including shopping centres,
offices, and industrial properties.
Rationalisation during a recession is vital for the property manager.
The astute property manager will be proactive, addressing tenants'
problems before they arise. Tenant contact and communication is more
important than ever. It enables the property manager to anticipate
problems, plan for lease expiry and so on. All of this, including
assiduous care for the property, protects the client's investment. It
may be that the client needs to be alerted to changes in surrounding
property values or uses. Avoiding rental voids, which may require moving
a tenant, and succession planning are all essential jobs for the
property manager in servicing a client successfully.
Increasingly the management of individual properties is being regarded
as the management of individual businesses and therefore budgeting and
cost control have become paramount. Some tenants have asked for a
reduction in service costs, but the pragmatic agent will aim at a nil
increase or one corresponding to the current rate of inflation. This, of
course, has to be achieved while still maintaining acceptable standards.
In a recession tenants are often unable to pay their rent on time,
which causes the landlord difficulties, as he relies on the income to
pay the interest on his borrowings. Because of the knock-on effect on
the capital investment, landlords are reluctant to reduce rents; they
will, however, in some cases accept payment on a monthly, rather than a
quarterly basis. Ratners is currently negotiating this method with its
landlords for a limited period.
This inability to pay on time has resulted in many vacant properties,
causing more of a headache to the already pressurised landlord, who not
only loses his income, but additionally has to fund the property, adding
to his cashflow problems. If he is also involved in surveying, he will
be finding the market increasingly competitive, with fierce fee
undercutting taking place.
Service charges have been brought into sharp focus by the recession,
especially in the case of shopping centres, where retailers are faced
with falling revenue and increasing overheads. In these centres they
usually represent a relatively small percentage of the tenant's fixed
charges. Service charges have been brought into sharp focus by the
recession, especially in the case of shopping centres, where retailers
are faced with falling revenue and increasing overheads. In these
centres they usually represent a relatively small percentage of the
tenant's fixed charges.
Service charges have recently come under an exceptional level of
scrutiny, creating a growing industry for service charge investigators
-- many of them ''poacher turned gamekeeper''. Additionally, rents are
fixed on a five-year cycle and traders now find themselves paying high
sums agreed in boom times.
A recession affects costs which in this case translate into service
charges, the amount incurred by the landlord (in addition to rent) for
the provision of services and facilities for his tenants. These vary; in
a shopping centre they include the employment of management staff,
repairs, heating, lighting, cleaning and security; in an office the
services are usually more restricted.
The service charge depends on a number of factors, such as the
physical layout of the building, its age and the level of services
provided; for an office block it works out at approximately #2.50 per
sq.ft, whereas the costs for a shopping centre will typically amount to
#4-#5 per sq.ft of the space occupied. This cost is ultimately passed on
to the shopper, through the profit margins on goods.
Another feature, not directly related to the recession, but
nevertheless a consideration, is the significant increase in insurance
premiums, as a result of UK insurers withdrawing cover for terrorism. A
scheme is being set up by the Government to reinsure the risk but it is
anticipated that premium rates will still increase by as much 100%.
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