Housing associations have historically failed to extract maximum value from their non-residential portfolios. Will Rutter and Matthew Shefras explain why that is starting to change
It seems all too frequent that, as you drive past a new mixed residential and commercial development, the first buyers and tenants are settling into their shiny new flats and looking to make a place they are proud to call home, but swathes of commercial space at eye level are still boarded up. In fact, many years past first residential occupation, it is often the case that commercial units will still be vacant.
Understandably, the key driver for the majority of new-build mixed-use developments is the residential sales. But the non-residential space is usually the gateway to the scheme and plays a major role in creating a sense of place and serving the new community.
Mid- to large-sized housing associations which have the scale to develop their own schemes will most likely own a sizeable portfolio of non-residential properties, ranging from community spaces to nurseries, health centres, shops and restaurants. Usually, these are the by-product of mixed-use developments and, as landlords, many housing associations have struggled historically to drive benefit and value from their non-residential portfolios.
However, the past few years have seen some major associations starting to buck that trend by waking up to their non-residential portfolios. Lessons can be learned across the development sector.
What has been the problem?
An analysis of the reasons behind the historical poor performance of housing associations in this area leads to three recurring themes:
1. A lack of management of existing assets. The resource in any housing association has rightly always focused on serving its residential tenants. That is its core business. Commercial leases require other attentions: reviewing rent, renewing expiring leases, considering break options and getting service charge collection right, to name a few.
2. Not getting best value on first and subsequent lettings. Associations have not necessarily acted as sharply as commercial landlords would, particularly where there are elements of community use within schemes.
3. Not giving strategic consideration at the conception of a scheme to the design of the commercial space. Not enough thought is given to who will be the likely end occupier, which is often a key reason why it is difficult to secure early occupation of new-build commercial space. In many cases, permitted uses may need varying and alterations may need to be made to make it suitable.
How to solve it
The benefits of avoiding these pitfalls are numerous and mostly measurable. The advantage of maximising rents and sale prices is obvious, but there are also cost savings associated with getting vacant spaces occupied, such as cutting the landlord’s spend on business rates and increasing contributions to service charges.
Where a commercial space on the ground floor of a block of flats has a strong anchor tenant secured at the point of sale of the residential flats, it can increase the value of those flats and assist with the marketing of the scheme. And while it may be less easy to measure more intangible benefits such as “placemaking”, doing so undoubtedly drives latent value in the land over time, in addition to contributing to greater tenant satisfaction.
The lack of an internal resource and management structure leads to poor visibility of an organisation’s assets and a lack of understanding of how and where best use and value can be driven. The issues that need to be answered should start on day one at the inception of the scheme, so that the needs of potential commercial occupiers can be factored in.
The steps to take to drive value and efficiency from non-residential space sound easy, but in a large organisation with a sizeable portfolio and more in the pipeline, it can take time to turn the corner.
Will Rutter is a partner in the social housing team at law firm Winckworth Sherwood
The Genesis story
Recent changes in legislation have served as a trigger for housing associations to look more towards commercial assets as a viable opportunity to enhance income and provide key services to residential communities, writes Matthew Shefras.
By adopting a more considered approach to commercial delivery within the overall development process, housing associations and developers can provide vital non-residential services to complement the residential offer.
Traditionally, the residential asset is the key driver for mixed-use developments, and given that the primary experience of many in-house development managers is in bringing forward the residential elements, there is little focus on the commercial aspects, which are often shelved until the end of the design/development process.
The lack of an early stage involvement can lead to a compromised position at the end of the process, which can ultimately lead to a loss in revenue. Key considerations, such as use, specification and layout are often not appropriately assessed in terms of what is viable for the location and market. In addition, as markets rapidly evolve, the need for ongoing assessment of the commercial offer is vital.
An example of this can be seen at Genesis Housing Association. With a non-residential portfolio consisting of retail, restaurants, gyms, nurseries, offices and medical centres, Genesis is very much at the forefront in the development of viable non-residential assets that reflect the placemaking philosophy, which can be seen in the successful delivery of several mixed-use schemes
For the past three years, Forty Asset Management (40AM) has worked alongside the team at Genesis conducting a thorough review of its existing non-residential portfolio, creating an asset optimisation strategy.
This strategy, which focuses around working alongside existing Genesis partners, includes a comprehensive review of the assets, identifying opportunities to add value through change of use, lease engineering, disposal, rent review and lease renewals.
Genesis brought in an internal asset manager with a commercial background, and asset tests were developed to identify those assets which, it was felt, would continue to show growth and were in strategically important areas.
An example of an asset that was recently identified as being suitable for optimisation was a unit situated beneath a 117-unit scheme near Old Street in Shoreditch, London, with a ground floor and basement extending to 550 sq m. The original planning permission was granted on the basis of a mixed-use consent, but with onerous planning obligations on the use and hours of trade of the ground floor.
As commercial use was not at the time being considered in terms of its viability, the unit was poorly configured, with drainage runs dissecting the property at multiple points. The unit was left in shell configuration with no shopfronts and the property lay vacant for many years.
40AM worked with Genesis and its consultants to tidy up the planning issues and implement a works programme to put the unit into an acceptable specification, creating clear open space. With its proximity to the tech hub area of Old Street, the unit was marketed and a transaction was agreed with an established advertising agency. The end value created by the improvements led to a capital value increase of 43% against the previous Red Book value.
In the context of the overall Genesis non-residential portfolio, this adopted strategy led to an increase in rent roll of 46% over an eight-month period from November 2013, and the overall increase
in portfolio value was 29%. This was in addition to reducing the vacancy rate from 45% to 16%, and bringing in capital receipts of £4.5m.
It is this collaborative wholesale approach that creates viable commercial assets that work in synergy with, and provide valuable resources to, the on-site community.
Matthew Shefras is managing director at Forty Asset Management
