Corporate Property: Hot property

Office space has never been given so much attention - businesses are keener than ever before to make the most of their property. Alice Haythornthwaite reports

The economic downturn is causing many businesses to reassess what has traditionally been an incredibly under-used asset - office space. As managers carefully think through their next step, there's a growing awareness that more can - and should - be made of office premises, not only in terms of using space efficiently and costeffectively, but also in terms of marketing the company to customers and creating the right environment for staff.

Particular attention is being paid to the leasing versus owning debate. Generally, the natural instinct of owner managers seems to be to own their business property - just as investing in your own home tends to make more sense than endowing a landlord with your hard-earned cash. It's an asset that should, in the long term, increase in value, and could be a useful resource should the business fall on difficult times.

These may sound like good reasons to buy or keep hold of your business real estate - but the experts have many strong arguments as to why you shouldn't. Christopher Jenkins, founder and senior partner of business advisory and accountancy firm Wingrave Yeats, points out that many people simply do not understand the true cost of owning business property. Tying up money in bricks and mortar means less investment into the business, and he says owner managers need to ask themselves what they really understand best - their business or property development. If it's not the latter, don't bother.

'If you're in business to make profit, don't rely on property. Why tie up your capital in something that is not what you're best at doing?' Jenkins asks. 'People think property is a fallback to sell if the business goes wrong. But that's actually saying you have no confidence in yourself as a businessman - in which case, you shouldn't be in business anyway.'

Paul Winter, managing director of management consultancy Corpra, agrees: 'You're generally better off leasing because you get less net return out of owning something than you do out of selling more of your products or investing in research and development.'

Property problems

If that's not enough to put you off, consider the risks. Though businesses may take advantage of low loan rates when purchasing property, Jenkins warns that they can be hit hard by sudden rises: 'The quickest thing that can pull your business down is loan rates at over 17%. I have clients who have been dragged down by the fact that they own a property.'

Once rates are high, your property will of course be harder to sell, and you'll be locked into owning it. And while your business struggles, your competitors will be able to rent relatively cheaply and have much more flexibility in the market.

Jenkins also points out the little-understood perils of buying property through corporate pension schemes. Should the property rise considerably in value, the scheme could become over-funded and thus disallowed by the Inland Revenue for tax purposes. Owning your office building can also make your business much more difficult to sell on retirement, adds Jenkins. A potential buyer might not want the property as well, and if they take your business away to combine with theirs, you'll be left with an empty building.

And while owning your property could cost more than you bargained for, being a tenant can actually pay. Buildings are obviously worth far more occupied than empty, and property owners will often fork out to encourage companies that can command usage of around 100,000 square feet to be anchor tenants. Typically, a business may be paid a substantial sum to move in and may then be given six months' or so free rental. Landlords may even give you money to move out too.

'I know a large legal practice that has, over the last five years, probably made just as much through property dealings as tenants as they may well have done out of running their business,' says Jenkins. 'Being a tenant is not necessarily a bad thing. You can turn it enormously to your advantage.'

Another problem of office ownership, particularly for growing businesses, is inflexibility: 'Unless you can be very clever, managing space that you're not using and putting tenants in, you'll always have either too much or too little property,' says Jenkins. Winter adds that the development of businesses from start-up to maturity and so on is so much faster these days that you can no longer build solutions that last 20 years, 'because all it does is sterilise and create illiquidity'.

It's worth bearing in mind that businesses paying rent on an annual basis tend to use their office space far more intensively and efficiently. Pride of ownership can be a great hindrance in this respect. Winter says that although this point may seem obvious, it's 'really difficult to get it through to a corporate's head'. The point has been emphasised in a recent report published by RICS, the professional body for chartered surveyors. In Property in Business - a Waste of Space?, Roger Bootle reveals that owneroccupiers lose up to £9.5bn a year in potential cost savings through space wastage.

Winter agrees that property owners can get 'sloppy': 'If you're owning freehold headquarters office blocks, it's a monument to your past and it's probably an indicator to what your future is as well - which is probably not going to be very good.'

One way of saving space and potentially cutting costs is leasing through an office provider. Businesses can take up less space because facilities such as meeting rooms are shared, and you only pay for them when you use them. The centres offer considerable flexibility, making it easy for companies to take on more or less space as they need it. Additionally, businesses can move in immediately, saving time and fitting-out costs, and unlike conventional leases, there's no dilapidation charge when you move out.

'Your financial costs work out to be as cheap as the conventional lease, if not cheaper, but when you add all the extras that you forget about - like fit-out and dilapidation charges at the end, it's actually a better financial package,' says Longford Business Centres joint director Jane Gwillim-David.

It's a good time to take this option too - some office providers, such as Regus and MWB, are consolidating after having expanded extremely quickly, and are currently offering discounts in order to fill the space.

Capital idea?

So are there any circumstances in which it does make sense to own your property? Jenkins believes there may be key development areas where it could be clearly advantageous to buy if there are government incentives to do so. There may also be certain situations where the property market may be in a business's favour. One of his clients, Simply Vinyl, recently bought office premises in Wimbledon for this reason.

'We knew they weren't going to expand enormously over the next five years and therefore wouldn't outgrow their property,' he says. 'Their key area was their production and storage area, which they could grow into and which was fairly cheap space anyway.' The move has saved the company significant running costs, since it no longer has to spend in excess of £100,000 on third party warehouses. However, Jenkins says he will still probably recommend that the business move out and lease in about three years' time.

Winter thinks using a freehold building intelligently can raise capital for projects for your next stage of growth, but warns that companies are often simply looking for cheap capital and ignore the inflexibilities and operational inefficiencies it produces. 'If you happen to have a freehold office, is it really right for you to raise as much money as you can from that building through rent, so that you're fixed in that space for 10 or 20 years, or is it better to sell it for slightly less money, vacant, and move and rent somewhere else? It's very often better to do the latter, but very often companies don't.'

Make the most of it

Regardless of owning or leasing, businesses can do a lot to make more of their office space. Bootle's report reveals that UK businesses are throwing away up to £18bn a year through inefficiency in their use of property, and suggests that cutting out this wastage could increase gross trading profits by up to 13%, 'dramatically improving the economic performance of the UK'.

According to Winter, however, these projections miss out an important part of the equation. While using space more intensively makes sense, it's not as simple as selling off space and squeezing people into a smaller area: 'Without the right thought for recruitment, retention, marketing, promotion, IT, production, logistics, geography and so on, you're going to upset your staff. Rather than getting an increase in gross trading profits, you'll get a reduction in your productivity, and your turnover and sales.'

Winter's management consultancy, Corpra, focuses particularly on property strategy, following a fundamental belief that 'if you get the alignment between the business plan (and all the other primary functions of the business plan) and the real estate right, the real estate produces an incredible engine for delivering change, refocus or redirection'. Unusually for purveyors of property solutions, Corpra consultants are dual-qualified in both property surveying and business management. They consider all aspects of a business, from its operations to its staff and culture, in order to provide the right strategic advice.

London-based corporate finance house Tenon Livingstone Guarantee used Corpra to help it relocate from shared rented offices near Euston to its own rented premises, and is extremely pleased with the results. 'They found what we consider to be perfect premises for us in terms of location, size and layout, and it's contributed hugely to the company's growth development value,' explains Tim Lyle, managing director of Tenon Livingstone Guarantee, now based on the Strand. 'It's given us a completely different image, both internally and externally, and says that we're serious players. It's giving the right impression to clients and prospective clients, and it's significantly helped us to improve our standing within the marketplace.'

Similarly, Corpra helped a marketing company save £200,000 a year by discovering that, despite assumptions to the contrary, neither customers nor staff felt its London West End location was necessary. It has now relocated to a building in Kilburn in North London, which Winter says will reflect all the marketing images the company wants to send out 'and we'd fully expect that company to grow faster as a result'.

Lyle says the competition to Corpra offered little more than details of premises on their books and didn't delve into the details of the company's ethos. Winter agrees that the average chartered surveyor doesn't know enough about business to advise someone strategically on real estate, and as chairman of RICS's Management Consultancy Faculty, is trying to encourage surveyors to do the extra management training.

Businesses are obviously cottoning on to the benefits - Corpra has grown by an impressive 70% in the last 12 months alone and expects to grow by another 50% in the coming year. What's suddenly made companies recognise the importance of efficient office space management?

'I think there's a bit more thinking going into British management than there used to be,' says Winter. 'Many companies still won't bother reviewing their position during good times, even though we could help them make so many easy gains, and help protect them from tougher times in the future. The British industry hasn't yet got the hang of counter-cyclical work and is still quite reactionary. But there is a large posse of great managers, usually well-trained, or quite enlightened, who do understand - and that's where all our business is.'

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