Refurb and prosper

News

26 April 1986

He argued that low inflation levels, ready availability of lettable space and rapid developments in information technology had forced a change in tenant/owner relationships; this has produced a situation where the quality of a building and the cost of future refurbishment have as much impact on the tenant’s decisions to lease as location.

“Gone are the days when a 21-year fully repairing and insuring lease with seven-year rent reviews represented a ‘blue chip’ office property investment. Gone also are the days when location was the deciding factor in terms of lettability and rental income.”

With property having to compete against more “durable” investments such as equities, fixed interest loans, bonds etc, Mr Finn contends that frequent capital injections and a change in the nature of leases, with built-in responsibility to carry out improvements, must take place to stop the “wasting” of property investments.

Mr Finn cited the American system, where landlords take all maintenance and refurbishment responsibility and tenants have relatively short leases. These arrangements avoid the conflicts of interest in the UK between a building’s owner — who wants to enhance it to modern standards, thus maximising the asset value — and the desire of the tenant — who has to carry out the work — for stability.

While the advantages of refurbishment flexibility are improved lettability, better rental growth and property values increased beyond the dictates of inflation, there may be one drawback. Investors may be unwilling to pay as much initially for an investment if they are faced with a constant dipping into funds to achieve an investment value only marginally better than other investment mediums.

However, such are the demands of tenants and the demands placed, in turn, on them by technological requirements, that the importance of refurbishment in a property’s value will be hard to ignore. Mr Finn concluded: “We have had the gimmick era, perhaps the time is ripe to demonstrate to potential tenants the value of a building which can easily be adapted to suit changing office requirements.”

If property investments are not to become “wasting assets”, investors in an increasingly tenant-led market must consider the flexibility of their properties to accommodate frequent refurbishments. This was the message from RICS building surveyors divisional council member and Drivers Jonas partner, Michael Finn, speaking at the Building Industry Convention in Brighton. He argued that low inflation levels, ready availability of lettable space and rapid developments in information technology had forced a change in tenant/owner relationships; this has produced a situation where the quality of a building and the cost of future refurbishment have as much impact on the tenant’s decisions to lease as location. “Gone are the days when a 21-year fully repairing and insuring lease with seven-year rent reviews represented a ‘blue chip’ office property investment. Gone also are the days when location was the deciding factor in terms of lettability and rental income.” With property having to compete against more “durable” investments such as equities, fixed interest loans, bonds etc, Mr Finn contends that frequent capital injections and a change in the nature of leases, with built-in responsibility to carry out improvements, must take place to stop the “wasting” of property investments. Mr Finn cited the American system, where landlords take all maintenance and refurbishment responsibility and tenants have relatively short leases. These arrangements avoid the conflicts of interest in the UK between a building’s owner — who wants to enhance it to modern standards, thus maximising the asset value — and the desire of the tenant — who has to carry out the work — for stability. While the advantages of refurbishment flexibility are improved lettability, better rental growth and property values increased beyond the dictates of inflation, there may be one drawback. Investors may be unwilling to pay as much initially for an investment if they are faced with a constant dipping into funds to achieve an investment value only marginally better than other investment mediums. However, such are the demands of tenants and the demands placed, in turn, on them by technological requirements, that the importance of refurbishment in a property’s value will be hard to ignore. Mr Finn concluded: “We have had the gimmick era, perhaps the time is ripe to demonstrate to potential tenants the value of a building which can easily be adapted to suit changing office requirements.”