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Firms seek to reduce property holdings

Thursday, 22 May 2008

The economic slump has pushed up the number of firms planning to reduce property holdings.

Fewer firms expanded their property portfolios over the last six months, the latest CBI/GVA Grimley Corporate Real Estate Survey reveals.

The twice-yearly survey, conducted between 12 March and 4 April 2008, reveals a balance of +15 per cent said they had increased their property holdings in the last six months, indicating a slower rate of growth than in the previous survey (+22 per cent) and some way below expectations (+21 per cent).

Contracting property space

Twenty per cent of firms now plan to reduce their property space - a marked increase on the 12 per cent of firms contracting their property in the past six months.

Twenty-seven per cent of firms still expect to expand their property holdings in the next six months, giving an overall balance of +7 per cent.

In the extraction & utilities sector, a balance of 48 per cent of firms said their property holdings contracted over the past half year, while a balance of 74 per cent expect it to reduce in the coming six months.

More firms in engineering and manufacturing also expect to contract their property space than expand it.

The survey asked firms how the credit crunch has affected their ability to do business and found, unsurprisingly, that by far the greatest impact is being felt in the financial services sector.

Restructured lease

As well as a reduced ability to borrow money and delays to projects, firms said key effects of the credit squeeze were to be seen in impacts on property disposal and acquisition.

A mere 1 per cent of firms in the survey said they thought the credit squeeze offered them any opportunity to derive value from their portfolio.

Some are, however, taking positive steps to manage their property: 22 per cent of firms have restructured a lease to lower overall occupancy costs and 19 per cent have obtained a reduced rent.

Only 4 per cent exchanged a tenant's option to break their lease for a cash fee, though 27 per cent have considered it.

Howard Cooke, director at property consultants GVA Grimley, said that the rapid expansion of property seen in recent years was really starting to peter out.

Impact of the credit squeeze

He added that far fewer firms have sought to expand their property holdings in the last six months and that more are now looking to reduce it in the next six months.

"The impact of the credit squeeze, while acting as a drag on the economy as a whole, is still mostly making itself felt in the financial services sector. Nevertheless, at times like these, firms in all sectors need to be thinking of ways they can manage their property better,” Cooke said.

He explained that much can be gained by restructuring a lease, reducing your rent, or paying to break a contract.

“Currently, firms appear unaware that the credit squeeze presents opportunities as well as threats," he noted.

For half of UK firms, surplus leasehold property remains a real problem, despite leases having shortened in the last 15 years.

Changes to empty property rate relief

Recent changes to empty rate relief have made holding onto disused property much more expensive.

Firms with the most surplus property are retailers (90 per cent). Extraction & utilities companies find themselves nearly as burdened (83 per cent) followed by the financial services sector (73 per cent).

Karen Dee, the CBI’s head of infrastructure, said that the recent changes to empty property rate relief are adding a billion pounds a year to businesses' property costs.

She warned that firms tied into a lease may have little room for manoeuvre, but advised all companies to seize the opportunity to review their surplus property, or face these extra costs.

"This survey shows not many businesses have so far been able to reduce their surplus property. This is in large part due to the time lag inherent in changing property holdings,” Dee said.

Issue on the boardroom agenda

She added that the ninety percent of retailers with surplus property would be conscious that they can little afford this drag on their business at a time of slower consumer spending.

How to make more efficient use of property is an issue on the boardroom agenda for 61 per cent of firms, according to the survey.

Firms in manufacturing (84 per cent), transport (82 per cent), engineering (80 per cent) and retail (72 per cent) were most likely to have this on their board agenda.

Half of businesses in the survey said they benchmark their property costs against other firms, and this rises to 96 per cent for the largest firms, 85 per cent for retailers and 87 per cent for extraction & utilities companies.

Only 12 per cent of construction firms benchmark property costs, however, as do just 28 per cent of manufacturers.

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