Collaboration between like-minded owners and tenants is the sector’s biggest game changer

Enlightened owners of real estate understand the central place of occupiers. At the simplest level, this is about optimising lettings and retaining occupiers, thereby reducing portfolio void rates and maximising rental income.

But equally importantly, it is about anticipating, responding to and collaborating to position property for the major structural changes of the future.

Traditionally, the UK market has been characterised by long lease lengths and landlords who kept their tenants at a cool distance for the full 20- to 30-year term. But moving in the direction of international markets, UK lease lengths are shortening, and with that comes a more enlightened approach.

Need for flexibility

This changing focus has been reinforced by the effects of the recent downturn; exposing and punishing those passive, heavily-geared landlords who relied solely on the capital appreciation of a rising market to support their investor returns.

Fund managers are more motivated to take a more proactive stance to asset management; and the world has become a place that rewards those with the right skill sets and a willingness to roll their sleeves up and get involved.

Not only is this about extensively refurbishing and reconfiguring assets to better support occupiers’ needs and drive values, but also, in light of endless waves of tenant administrations, having frank and open conversations to ensure that rents are set at sustainable levels.

We have also witnessed a string of clever tripartite deals, which has made the market sit up, where purchasers got to know and really understand the future growth requirements of their tenants long before entering into ownership. This has allowed synchronised regears, or even exchanges of occupancy on completion. Likewise, with the temporary demise of speculative development, creative forward fundings rose up in its place with high-quality schemes designed to cater specifically to the forward-thinking, long-term demands of strong covenant occupiers.

Clearly, different sectors have very different dynamics. The greatest progress has been witnessed in the retail and leisure markets, where the more progressive landlords are forming strong relationships with the large supermarkets, restaurant chains, and high street/out-of-town stores they will be working with time and time again across UK-wide, or even global portfolios.

In comparison, the office sector has been harder for the collaborative approach to penetrate, with occupiers still tending to take single long leases on a property with an expectation that its ownership may change hands four or more times before their leases come to an end. One of the advantages we have enjoyed in our own business is access to Legal & General Investment Management’s wider platform.

Typically, the wider business invests in 4% of all UK plc, and therefore benefits from extensive knowledge of, access to and relationships with the UK’s top occupiers. Using this intelligence, we have been able to take a more sophisticated approach to covenant ratings. We can look beyond the views of average credit rating agencies to underline investments and structure leases that enhance value for investors, but are also cost effective and sustainable for the occupier.

Ultimately, the Holy Grail that many have been working towards is trying to become the “owners of choice”. Those who lead the way in terms of adopting new, cutting-edge technologies, working with tenants to enhance energy savings and take on key feedback, surely make a significant difference to the operational efficiency of a business.

Indeed, perhaps the biggest game-changer has been seen in the area of sustainability, where like-minded owners and tenants are sharing information, retrofitting and collaborating to make real progress, not only bringing down costs and significantly improving staff retention levels, but also helping to future-proof their properties.

We believe that the UK economic recovery will be uneven. While the improved outlook is very welcome after the relatively depressed years following the financial crisis, a number of important themes are set to differentiate the winners from the losers. An entrepreneurial, but informed and collaborative approach to occupiers is key.

To be a good real estate owner, you have to get inside the mind of your tenants. Taking a holistic look at risk and reward, which must be founded on an appreciation of the occupier’s perspective, will ensure that real-estate investment returns flourish alongside the success of its customers.

Bill Hughes is managing director of Legal & General Property