From sustainability issues to lease accounting changes, a panel of expert occupiers and advisers share their views on the main issues of the day.
The recession made it an occupiers’ market but, when markets change, will landlords once again be interested only in income, or will they move towards a service culture for occupiers?
John Killey I have a foot in both camps because I am now a landlord. Obviously, in a recession, it is difficult to attract tenants. So any added-value services you can provide will make the difference between you and other landlords – and, with demand coming back, I want to differentiate myself.
In terms of existing stock, I think landlords will revert to type.
Nicholas Giraudeau It’s difficult to clump landlords together as a group. It depends where you are and who you are dealing with – you could be dealing with an individual landlord in Algeria or an institution in Western Europe. And it always comes back to market cycles.
Overall, there is a general tendency of improvement from landlords, but the market is dictated by supply and demand.
Brendon Walsh From the public sector point of view, we occupy buildings and also see how landlords operate with other tenants. Some take a tactical approach while others, such as SEGRO, take a longer term view. SEGRO is the biggest commercial landlord in Ealing and it appears supportive of its tenants. We find that attractive.
Matthew Stone Is SEGRO exceptional?
Walsh It depends on the organisation. Speculative investors come in and are not there for the long term, whereas SEGRO is. Our preference is to work with people who are there for the long term.
Geraint Williams Certain landlords take a long-term view and they want a good relationship with us. We have another category of landlords who, through the hard times, have been inflexible, which reflects the economic pressures they face. This has made us think carefully about the kind of landlord we want to use.
As a landlord ourselves, we will bend over backwards to ensure we get and keep tenants. The recession has driven home to occupiers the need for flexibility. The change in empty rates relief has shifted the balance beyond the recession, and landlords will be careful about their service offering in the future. Everyone is aware that the cost of empty property is now great. No one wants to be stuck with it.
Michael Creamer There has been a fundamental shift in the market. People are going to be looking at their existing space and asking themselves: “How are we going to be able to use this better?”
Killey It will be a real push to go back to how the market used to be.
The sustainability agenda rode high before the recession. Has it now died or is it embedded in your company culture?
Creamer In the corporate world, sustainability is embedded in the culture – it’s about image, good business and the FTSE4GOOD index. And we are now seeing that translated into real estate.
Williams Sustainability is desirable and it’s good business – a penny saved is a penny earned. The challenge is where you have a significant legacy estate, where the cost of implementing sustainability is higher, making it harder to establish a business case. With new-build, it is easier to do something cost-effective. You will reach a point where payback will improve and then the whole green agenda will become even more attractive to the real estate people.
Killey Yes, the biggest challenge is clearly in existing stock. New-build is easier. We talk about sustainability and we focus on energy, but there are so many other aspects to look at.
A lot of organisations are starting to understand that energy is not the be-all and end-all. But do we try to be sustainable because it makes us good citizens? Is being sustainable really in our DNA? I think it’s getting there. The agenda has been slowed down by the recession, but it had a big enough foothold beforehand. Also, legislation will force companies to do something.
Walsh In the public sector, we have no choice in the area of sustainability; we must do it, and we must be seen to be doing it in our buildings. What’s encouraging is that I see developers coming in with proposals for buildings with sustainability measures in them. Before, sustainability was an afterthought; today, it is at the forefront because it is all about the money that they can save.
Giraudeau Carbon-neutrality is important in the workforce. In HSBC, sustainability is viewed as equal to efficiency. It’s an integral part of us being a business. As part of our company strategy, we have programmes dedicated to sustainability issues in building efficiency, energy efficiency and waste. We have invested $125m in Better Place, the world-leading electric vehicle supplier – our approach is across the business, not just in CRE activities.
Sustainability has to take a wider view rather than just be about energy savings, particularly as we are working in some challenging communities.
Killey Responsible banking is not just about responsible lending – we want to be responsible to the environment in the way we run our business.
Walsh When we sold a car park in Ealing, we expected a massive backlash about the lack of car-parking spaces, but what we saw was a rise in the number of cyclists – we are even looking to encourage cycling, by doing what [London mayor] Boris Johnson has done with the “Boris bikes”. Sustainability is not a real estate agenda, it’s a corporate agenda.
The proposed changes to lease accounting seem to divide opinion. Some believe there will be no effect while others want to own everything. What’s your view? Do you think the market will change?
Williams Speaking as a chartered accountant, occupiers will have to be very careful and look at the contracts that they get into. Occupiers with long leases will feel the effect of any changes, more so than those who have a portfolio of different lease lengths. It will give rise to a more formal process for reviewing and documenting expectations for events like lease breaks.
Killey It’s difficult to get a gauge of exactly what it will change. I don’t think it will change occupiers’ behaviour. But, everyone is hyped up to a point about it, without being sure what will happen.
Giraudeau We have modelled the effects on P&L and the balance sheet. It’s the estimation of likely term, if that remains in place, that makes it complicated. Apart from managing around 8,500 spreadsheets for each lease, revision would create huge management headaches. We continue to review our lease-versus-own strategy, but we are not going to change our behaviour in terms of flexibility.
Stone The principle of putting leases on the balance sheet will make people ask: “How long do we need this property for?”
Williams Also, your financial reporting will be sensitive to the assumption you make for lease breaks, and that’s a challenging situation for all of us.
Stone Retailers are petrified about this. They have long leases – in some cases, 25 years – and relatively weak balance sheets. The principle of putting leases on balance sheets is not a question of if it’s going to happen, but when.
Williams In defence of the accountancy profession, because of the recession, we have seen a number of high-profile failures, and some had onerous leases. Had the proposed changes been in place before the companies went under, the accounts would have better reflected their financial circumstances and their fragile nature would have been exposed.
What are the biggest issues in your sector – both public and private?
Walsh For us, it is the risk of having fewer people in the public sector encouraging inward investment and making the case for development. With cuts coming, this may be an area that is sacrificed. In Ealing, we have worked very hard with private-sector investors to put together a public-private brand, EalingInLondon, to fund activities such as a stand and materials for MIPIM to help us promote Ealing.
Williams The biggest issue for us is the flexibility of leases. Our business is driven by our portfolio of contracts, and we need to have the flexibility to reduce our property costs when a property is not contributing to service delivery.
Killey As we are seeing a shift away from Western Europe to the emerging markets, we are looking for the flexibility to change. So, the focus of our organisation is to manage our expenses, especially when we have seen growth. We have to keep a close eye on expenses, and make sure we have what we need, when we need it.
Giraudeau Our issue is getting the right infrastructure in place, and making sure we have the right platform for a business that is changing faster and faster. We have to keep an eye on which elements we can offshore. Also, when the Bribery Act comes into force [later this year], that will make us more aware of our whole supply chain and how we operate in foreign markets. As a result, we have to minimise the risks of working offshore.
Attendees
John Killey, managing director, Citi Realty Services, head of CRS Europe, Middle East and Africa and global head of building operations, Citi Group. Citi Realty Services oversees the management of Citi’s 75m sq ft portfolio in 12,500 properties in 100 countries.
Nicholas Giraudeau, head of portfolio optimisation, global corporate real estate, HSBC. The global bank occupies 9,174 properties in more than 90 countries.
Brendon Walsh, director, property and regeneration, Ealing council. Ealing is one of the biggest London boroughs, with more than 100 development opportunities including five Crossrail stations.
Geraint Williams, UK real estate director, Atos Origin. Atos Origin is a leading international IT services company, providing hi-tech transactional services, consulting, systems integration and managed services. The company occupies around 1m sq ft in the UK.
Matthew Stone, partner, EMEA capital markets, and head of UK occupiers services, Cushman & Wakefield.
Michael Creamer, partner, head of EMEA, corporate occupier and investor services group, Cushman & Wakefield.
