by Tom King
As high interest rates begin to bite throughout the economy many industrial companies are having to look at their asset base. Property assets are often neglected until a company runs into trouble, yet with proper management a company’s property assets can often be used to prevent it running into trouble in the first place.
The reasons for the neglect of property are, perhaps, understandable. The capital gains tax system penalises companies who revalue their properties, and so most businesses hold their properties in the books at historic cost.
This, in turn, disguises the fact that many companies are not producing an adequate return on the real value of their assets. If properties were in the books at current value, many shareholders would realise that management is not making their assets sweat.
Equally, management has enough to consider already without having to concern itself with property. Cash flow, staffing, order intake, marketing and numerous other tasks take higher priority than property.
A major piece of research by Reading University published last year pointed out that the majority of British companies are fundamentally ignorant of the value of their land holdings, and that they have little idea of how to enhance their value. Perhaps most depressing is the fact that this ignorance is spread right across industry.
Companies with medium-term expansion plans need to look at property more carefully: only if they form a clear idea of where their business is going can they plan ahead. With adequate forward planning, any firm can have a building constructed to meet its own needs, where it wants to be.
As the former proprietor of an engineering company, I have been through the process myself. For the past seven years, through Coordinated Land & Estates, we have been trying to help other companies to realise the value of their assets, through a process which we devised called the “Property Audit”. I feel that our experience holds several important lessons for any professional looking to advise firms on rationalising their property holdings.
The first and most important step is for the adviser to get to know the client’s business. Property advice is truly valid only if it is provided in the wider context of the client company’s operations. The corporate strategy and the interplay between subsidiaries are key pointers to a company’s underlying property needs.
A typical property audit operation will work as follows:
(1) On recommendation from a bank, institution or maybe a director, the potential client arranges an informal meeting with its adviser.
(2) The adviser should meet the company at the highest level, preferably that of chief executive, to discuss the company’s business, its philosophy on staff levels and its policy on investment in plant and equipment in order to identify its corporate targets.
(3) The adviser should visit all the company’s operations. It is not sufficient just to look at the buildings on each site: the key is to identify the company’s problems at first hand — to act in the capacity of a management consultant as much as a property adviser.
(4) A preliminary report is produced which identifies opportunities and recommends a course of action.
When a potential development opportunity emerges, the most equitable way forward is for the company to enter a joint venture with a developer. This has the advantage of allowing the company to carry the development off-balance sheet, and allows both parties to share in the profits.
The company puts in the land at an agreed valuation, and the developer should guarantee this element. It should be the developer’s responsibility to arrange funding on a non-recourse basis, and then project-manage the development which, on completion, is sold and the proceeds divided between the two parties.
Although once a property audit is undertaken there is a strong incentive to find development sites from within the portfolios, the advice that no such opportunities exist may be equally valid from the client’s point of view. This was the case in a recent exercise which we carried out for a major plc where more than 40 locations were investigated. Despite all the research involved, no positive opportunities could be identified.
It is crucial to select the right developer. Although CLE naturally likes to put itself forward to its clients as a suitable joint-venture partner, there are times when it may not in fact be the most appropriate developer to carry out the resulting scheme. A recent audit for a Midlands-based construction company found that one of their sites was suitable for residential development. We do not build houses, so the advice was for the company to sell on the site to another developer and our reward was no more than a modest fee.
A number of different advisers, particularly surveying and accountancy practices, claim to be able to advise companies on their property assets, and both are qualified to provide elements of the service. However, it may be that a multi-disciplinary package best meets the client’s needs.
In my experience surveyors often seem to find difficulty in grasping their clients’ corporate strategy. The traditional estates management course at university or polytechnic contains no general business education. Accountants, on the other hand, are fine when it comes to assessing the needs of a company, but so far, at least, they do not have the property expertise to actually go out and meet those needs.
The structure of a professional practice also militates against professionals giving the kind of comprehensive property advice which their clients may need. Large practices have vast numbers of administrative and support staff all living off the backs of the fee-earners. With large overheads to support, they simply cannot afford to see a company through the two to three years which it may take for the initial property audit to bear fruit in the form of a development. Developers, however, run a much tighter operation and can afford to be patient.
The simplest piece of advice which we would give to any company considering its land assets is “plan ahead”. Time and time again we have been approached by companies who are already in trouble. For example, John Howard approached CLE to look at its under-utilised plant in Chatham, Kent, yet before the development could take place the company went into liquidation and was therefore unable to share in the proceeds. This property audit resulted in £20m worth of development, and profits to CLE in the region of £6m.
