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12/08/2011

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Attacking the void

Empty properties can be the bane of the property industry, costing businesses millions in lost revenue. However, innovative ways of tackling this problem are springing up across the UK says Mark Hughes-Webb

 

The commercial property sector is at a crossroads when it comes to its attitude to and strategy on voids. Government policy in relation to business rates alone has contrived to make voids a financial burden on even the most well financed owner and with no end in sight to the policy, rates mitigation schemes have come to the fore.

Sadly the creativity with which consultants have applied to this area of client advice has not necessarily be prevalent in the run up to the underestimated issue of how to deal with voids – both strategically and practically.

It goes without saying that the de facto ‘strategy’ for most vacant commercial property is to get the property agents to handle the promotion of the available space in an effort to get it let on a traditional lease. But what happens when this either does not work or is not viable due to situations such as fag-end leases, properties awaiting development or even properties which have served their use? Just how sustainable and worthwhile is the ‘lock it and leave it’ approach?

Changing times
Having asked public and private sector property owners as well as owner occupiers, it seems that the concept of a strategy on voids is lacking especially in the short-term (one day to two years for sake of clarity). The defining characteristics of the sector are that there are traditional occupiers who will take traditional leases on standard terms. However, this really only applies at the higher end of the market – by covenant strength and the size of the property in question.

The realities of the current economic outlook and the fundamentals of how businesses are responding to this, as well as the unquestionable speed of change in business models, have largely wrong-footed the commercial property sector. In particular, SMEs facilitated by technology, in particular cloud-computing and mobile commerce and flexible work practices are able to set-up, develop and reinvent themselves at a speed which often leaves the property industry at their mercy. Furthermore, the growth in CVAs (Compulsory Voluntary Arrangements), pre-packs and phoenix companies that have been making headline news in the last two years are just some of the examples where the speed of change to a tenant’s business can impact on the landlord as well.

And the result for the sector, lots of vacant property – and no distinctions are now needed between retail, offices, industrial, leisure – it’s all just vacant space.

Plan of attack
The need for a voids strategy is all the more important in light of these trends and put simply it makes good business sense. Commercial property owners need to start understanding that they too are businesses who can offer more than just space and are not just investment managers and financial reporters looking for a profit.

The time has come for the commercial property sector to realise that it is primarily a provider of space and that the customer base for this space is changing fast not least in the small-medium business sector which after all accounts for some 3.6m companies and 33 percent of GDP. Small businesses require flexibility, cost certainty and in many different ways, support. And that support may well need to come from innovations in the delivery of commercial property.

In retail, especially in fringe locations and on the high street, there is a need for a new consistent business model with geographical penetration akin to the serviced office providers. Only large retailers have the property knowledge and scale to run efficient retail options. Independent retailers, so often feted as the missing link in the UK’s retailer mix, need greater support in delivering their offering – future retail entrepreneurs will know a great deal about the product or service and a huge amount about their customers but they may not indeed perhaps should not get bogged down in the complexities of the physical space they operate in. An “easy-in, easy out” model would allow such retailers the scope to try locations before committing longer-term, encouraging expansion and de-risking the potential costs to both retailer and landlord should it not work out.

I would go further and say that the concept of retail as we know it is dying if not dead. With £1 in £7 being spent at Tesco’s alone and £5.1bn being spent online in the UK in March 2011 alone, the focus should now be on brands and not retailers. For a start there are a huge number of brands – considerably more than there are retailers and if we are to try and fill the expected 10,000 retail units that are likely to close in the UK in 2011 alone surely this is a good place to start looking?

Break the mould
Moreover, nearly every product or service is seasonal – challenge yourself to think of ones that are not – so perhaps the model which we call ‘BrandHub’ has legs? Could a brand share a space with another brand for six months each for five years? I am sure any finance director in any brand-driven company could show you the months they would benefit from exposure in compared to ones they would not. And this could apply to more traditional occupiers too – so you have a frozen yoghurt company taking Spring/Summer and a soup company taking autumn/winter? These are bold suggestions but practically speaking only a willing landlord and a lawyer stand in the way of putting it into practice.

In offices, property companies may need to get back to basics – establishing their own brand identity to launch incubation hubs or even serviced office operations – either independently or in conjunction with more established operators. There will be costs and increased headcount but these should be judged against the increasing costs and the potential for brand loyalty and tenant expansion. The old saying about it being cheaper to keep a customer than get a new one seems to be lost on some property owners.
There is also scope to broaden the scale and scope of what the sector calls “commercialisation” i.e. non-rental income for landlords and owner occupiers alike.

Initiatives ranging from using new office developments and refurbishments for activities such as conferences and business meetings to film locations can bring in useful additional income which can be used to increase marketing budgets or alternatively the activities themselves if managed and promoted can offset the need for marketing spend by generating word of mouth advertising and “buzz” around a property. The government’s increasing focus on localism and the need to support growth in the private sector may yet still see other revenue opportunities created from renewable energy “feed in tariffs” and even temporary change of planning use to enable new businesses to be tried and tested.
For developers, recent high profile campaigns in relation to ‘meanwhile use’ for stalled development projects have not only got property press but national newspaper coverage. Incredibly creative concepts have been put forward (albeit primarily from outside the property industry) and all eyes will be on whether these can be turned into commercially sustainable models which can be adopted more widely. The increasing demand for cultural, leisure and sporting participation may well support this potentially emerging area.

And as far as innovation is concerned, where is this going to come from – inside or outside the property industry? Perhaps it’s time for more business people to take an interest in property companies and the vacancies that may arise. Perhaps the introduction of some new skills and more importantly other sector experience may just create the type of environments where innovation can start tackling issues such as what to do with voids?

Every company irrespective of the sector it operates in needs a business development/R&D function. Of course, you are unlikely to find this in any property company. So thankfully the increase in the number of niche consultancies and advisors in this area may just enable those property companies willing to adapt to benefit from this changing business environment.

Innovation is, after all, about creating and developing new concepts now – it’s not about taking old concepts and trying to make them work better when economic or financial conditions force you to.

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