Tuesday, November 20, 2012

Asset Management - Building Asset Value in Difficult Markets

Guest Article from Matt Bigam – Partner at Bidwells

Building owners should review their options in the current, challenging market. Active asset management can enhance value considerably and broaden market appeal subject to careful analysis and a full evaluation of local market circumstances. It is worth exploring different, accurately costed options.

Source: Google Images
In a flat market, characterised by limited demand, above average availability, and subdued activity in the investment sector, it can be difficult to create asset value. This can be especially challenging for older properties or buildings constructed in the last development cycle. Dated format and specifications can deter potential tenants who, in the current market, will typically have a relatively high degree of choice and strong leverage in lease negotiations. Similarly, outmoded or tired formats will deter potential investors who remain both scarce and cautious in today’s market.

When considering how to maximise asset value in a challenging economy, careful analysis of building options can improve both market prospects and investment value. Whilst detailed local market research is essential and capital expenditure needs to be very carefully considered, there will always be selected opportunities to create value via coherent asset management and enhancement initiatives.

As an example and for the purposes of analysis, let us assume a 30,000 sq ft office building which is approximately 15-20 years old. The net to gross ratio is 80/20 and the accommodation is divided over three floors, accessed via a lift and supported by basic air-conditioning. The property is assumed to have a single void floor. This property has been subject to a hypothetical asset review, placing particular emphasis on marketability and end investment value under three different scenarios.

Scenario 1 – Basic Core Refurbishment

Under this scenario, the following is assumed:

• No upgrade to building shell
• No external works
• Lift service and repair (but not replacement)
• Service and testing of existing infrastructure
• Basic refurbishment of reception areas and common parts
• No consequential requirements under Building Regulations

The cost of these works in today’s market on core only will be in the region of £10-£15 per sq ft, creating a potential improvement budget of £60,000- £90,000

Scenario 2 – Core and Basic One Floor Refurbishment

Here, the following has been assumed:

• Refurbishment as per Scenario 1
• Redecoration of one floor plate
• Service and upgrading of internal doors and review of fire  strategy
• No consequential Building Regulations adjustments

Under this scenario, refurbishment costs will equate to £15-£20 per sq ft. This produces an indicative refurbishment budget of £180,000 - £220,000, comprising approximately £60,000 for building core upgrade and £120,000 - £160,000 for the refurbished floor.

Scenario 3 – Core and BCO Cat A Floor Refurbishment

(The British Council for Offices' (BCO) mission is to research, develop and communicate best practice in all aspects of the office sector)

In this scenario, the core and one floor of the property are stripped back to shell and refitted to current BCO Cat A Standard.

Key aspects include:

• Mechanical and electrical services likely to require replacement or major upgrade
• Some consequential works arising from Building Regulations
• No external works
• Existing plant space is deemed to be adequate

In this example, refurbishment costs would rise to £40-£60 per sq ft with an approximate core upgrade cost of £60,000 and £320,000-£480,000 floor plate improvements. This produces a total potential budget of £380,000-£540,000.

In considering the above scenarios, it is of course imperative that detailed account is taken of local market conditions, particularly with regard to competing supply and the likely profile of tenant demand in the locality in question. The product clearly needs to fit the market and it is of course essential to avoid unnecessary capital commitments.

Source: Google Images
With regard to value and the attractiveness of undertaking asset improvement works, it is helpful to consider real-world situations. When this analysis is reviewed, factoring in current demand trends and net equivalent yields by building quality in the current market, in the case of a Scenario 2 refurbishment (Core and One Floor) would probably be sufficient to move the net equivalent yield on the asset inwards by around 75 basis points to approximately 7.75% based on today’s pricing with a good covenant. This produces a resultant rental uplift of circa £6-£7 per sq ft with a potential valuation uplift of approximately £700,000-£725,000. Thus, for an expenditure of £180,000- £220,000, the resultant uplift in value is considerable and clearly beneficial.

Under a Scenario 3 option (Core and BCO Cat A Floor Refurbishment), a yield of 7.00% and a rent of circa £25 per sq ft, producing an uplift of circa £5-£7 per sq ft, creating an overall potential value uplift of around £850,000-£900,000. This is also clearly beneficial, although less so in proportionate terms, than a more basic asset overhaul.  Further benefits include a more attractive reception and core areas for all tenants, which will help further rental negotiation and retention levels. Additionally a refurbished building will shorten the void period therefore speeding up time taken to recover rent, and reducing empty property rates responsibility.

In summary, building owners should review their options in the current, challenging market. Active asset management can enhance value considerably and broaden market appeal subject to careful analysis and a full evaluation of local market circumstances. It is worth exploring different, accurately costed options.

Information/opinions posted on this site are the personal views of the author and should not be relied upon by any person or any third party without first seeking further professional advice. Also, please scroll down and read the copyright notice at the end of the blog.

Established over 170 years ago, today Bidwells is one of the UK's leading property consultancies and employ almost 500 people in 11 offices across England and Scotland and provide a full range of services across the Commercial, Residential and Rural sectors.

Bidwell's provide commercial and residential property owners, as well as occupiers, developers and investors with a comprehensive range of services  combining a deep understanding of the strategic objectives of our clients and the marketplace, with the resources to deliver holistic property services. Clients include developers, institutions, land owners, owner occupiers, education institutions, government bodies and private individuals.

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