Local knowledge counts in changing property market

Digital technology has revolutionised all of our lives. Indeed, it is difficult to imagine how white-collar professionals would have coped with the restrictions of the pandemic without the likes of Zoom and Teams.

However, what is sometimes lost in all the hyperbole surrounding technology is that local knowledge is incredibly important – and that is especially true in commercial property. It is for this reason that we have been at pains over the years to build a team that has a genuinely comprehensive geographical spread, from Glasgow and Edinburgh, Newcastle and Leeds, Manchester and Birmingham, to Cardiff, Bristol and Exeter.

We have no problem with people working from home, but we do care where those homes are. There is a clear analogy here with the residential market. An outsider might look at two homes on opposite sides of the street that are ostensibly identical in terms of size and condition, and fail to understand why one costs tens of thousands of pounds more than the other. Anybody with local knowledge could tell you that the more expensive home is within the catchment area of a decent school.

We believe that knowledge is absolutely key to our business in terms of choosing which individuals, companies or strategies to back. Equally, having a strong presence on the ground in local markets means that our people can build close and lasting relationships with clients. The importance of trust cannot be overestimated. Data analysis can in large part be automated these days; building relationships cannot.

As a team, we also think deeply about the sectors and developments that we want to back. Certain sectors such as high-street retail have been affected by the pandemic, which, combined with the current economic situation and the threat of a potential recession, make for difficult funding decisions. However, sectors such as essential retail – think anything that was allowed to stay open during the pandemic – pretty much all residential assets and logistics are still key sectors of interest for Aldermore.

The student accommodation and later living sectors are also particularly interesting at the moment. A recent report from JLL found that as more ‘baby boomers’ hit retirement age, the over 65 population will hit 13.6m, requiring an additional 75,000 later living homes and 30,000 care home beds over the next four years. All in all, that will require around £30bn of investment, and with a growing ageing population we know that the demand will be maintained.

Investing in such facilities also makes sense because of the crisis in social care. At the moment, carers spend huge amounts of time driving between their customers’ homes, time that could be put to better use and for which they do not tend to be paid. Encouraging more people to move to specialist facilities could be a part of the solution of providing better care at lower cost.

Access to amenities

In countries such as the US, Canada and Australia, a high proportion of the over-65s downsize to later living developments as it is regarded as an attractive option. However, to get this right, developments need to be built in the right locations. Typically, people move into retirement living accommodation between in the ages of 70 and 80. At that point in their lives, most people still want easy access to amenities.

Another key area of focus for us is environmental sustainability. Clearly, this is increasingly important to all responsible businesses because of the need to demonstrate solid environmental, social and governance (ESG) credentials. In addition, forthcoming changes to regulations cannot be ignored and will force businesses to address this subject effectively and efficiently.

As things stand, landlords of commercial properties in England and Wales cannot, as a matter of law, enter into new leases for properties with an energy performance certificate (EPC) of F or G – the two lowest ratings. The penalties involved for doing so are significant: any breach could end up with a landlord being issued with a fine amounting to 10% to 20% of a property’s rateable value, up to a maximum of £150,000 per breach. So, any landlord that takes a cavalier attitude to the regulations will take a real hit if they are caught, especially if they own multiple properties with multiple leases.

There are some exemptions. For instance, the regulations do not apply if the consent of a third party (typically a local planning authority) is required to carry out works but if this is refused; or if the improvements would result in a devaluation of the property by 5% or more, or would damage the property.

Further, if a landlord can demonstrate that improvements would not pay for themselves over a seven-year period through energy savings, the regulations fall away. However, none of these exceptions are available to the vast majority of landlords.

Crucially, the regulations are about to get significantly tighter – and soon. In April, the ban on letting a commercial property with an EPC below E will apply to existing leases as well as new leases. That is little more than four months away.

It is then expected that regulations will get progressively tighter, with commercial properties required to have an EPC of C or better by April 2027 and of B by 2030. Of course, this could change, but given that the government is legally committed to hitting net zero carbon by 2050, realistically, the regulations are only going in one direction.

Room for improvements

All of this has commercial implications for Aldermore and the types of landlords and properties we want to do business with. After all, a commercial property that cannot be leased is of next to no value. That is not to say we will only work with companies that have already future-proofed their portfolios. Indeed, some companies may need support with funding for improvement works that would potentially add value. We’re open to discuss how we can back these customers.

What we do require is for partners to have a plan and to have thought seriously about the changing regulations and how they affect their business. We also need to have confidence that EPCs are accurate – and that brings me back to where I started. A solid EPC requires a solid survey undertaken by a dedicated professional. Similarly, plans for improving a property or portfolio’s rating need to be put together by somebody who genuinely knows what they are doing and can say with confidence that if the plan is followed to the letter, a better EPC will be forthcoming.

Relationships have a vital role to play in the commercial property industry. Not all deals can be sealed based on algorithms, and that’s where our network of professionals on the ground adds the value needed to build the foundations of long-lasting relationships.