Don’t be caught by surprise by the hidden costs of commercial property

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let-signAccording to Colliers International’s recent Global Investor Sentiment Report, 2014 will see an increase in commercial property investor confidence, with 74 per cent of UK based investors saying they were more likely to risk investing across all property sectors, although offices remain the most popular category to invest in. Yet despite this vote of confidence, it seems strange to report that the real costs involved in property acquisition and maintenance, are frequently overlooked by the purchasers. It appears that businesses often have a patchy knowledge of the range of costs involved in owning or leasing commercial real estate, which is surprising when you consider that a company’s biggest single investment next to its workforce is commercial property.

A white paper – Understanding the true cost of property recently published by space and infrastructure specialists Portal highlights this lack of awareness and argues that financial executives of companies who own or run their own property portfolios should shoulder the responsibility for ensuring that all costs – hidden or otherwise – are accounted for.

Keeping abreast of a building’s running costs means maintaining a greater awareness of how well a building is being managed, as the costs will vary enormously, depending on how well it is being managed. It also enables businesses to find areas where they can make savings, improve performance and prevent large holes appearing in corporate cash reserves. But for finance directors who are faced with collating evidence and making decisions across multiple property portfolios, let along a single property, the task is a big one, requiring considerable expertise.

However, a new joint initiative, which was launched back in the summer of 2013 should make the lives of those involved in property related finance decisions easier. Jones Lang LaSalle and the Better Buildings Partnership have produced the first annual Real Estate Environmental Benchmark, which is a research tool based on the assessment of nearly 500 UK offices and shopping centres.

Aimed at providing property owners, occupiers and managers with valuable (and often overlooked) data on energy, water, waste and usage costs, the benchmark helps identify buildings where running costs could be reduced. It is also extremely useful for comparing the performance of different buildings within a property portfolio, demonstrating lower running costs and improved energy management to key stakeholders such as tenants.

With businesses under growing pressure from stakeholders and having to deal with an increasing number of regulations, the ability to make informed decisions, whether on property transactions or on property management is crucial. Alex Edds, Director of Upstream Sustainability Services at Jones Lang LaSalle said: “With utility and waste costs increasing and forming an ever more significant part of a building’s overall running costs, it is important to know how your buildings are performing. The Benchmark provides a useful proxy for building owners, occupiers and managers to compare their own cost and resource use, and track how they are performing against the industry.”

The evidence provided by the Benchmark shows that offices with poorer energy management are spending as much as £225,000 per year, while offices that manage energy well, have running costs that are around 50 per cent lower with costs of around £125,000 per year. This clearly demonstrates that good management has cost-saving potential for owners and occupiers.

The identifiable costs include rent (which accounts for an average of 35 per cent of total office occupation costs), business rates (last set in 2008 at the height of the property boom), annualised costs (such as furniture and fit-out), facilities management (including insurance, general maintenance, security, waste disposal and energy), dilapidations and exit costs (requiring a tenant to restore the property to the same condition it was in when the lease was first completed) and management (this includes professional fees and management time, around 3 per cent of overall property costs).

There are a range of different commercial property options which include leasing and capital purchase of commercial property both incur different additional costs. Leases require deposits payable up front and put pressure on a business by tying it into a committed period of between around five to ten years, sometimes longer. Fitting out a leasehold property is expensive and a tenant is required to put things right when they leave, which can be pricey. A capital purchase requires a significant financial outlay to purchase commercial property, but it does give a company the flexibility of being able to sell it when required and in good times it will appreciate in value. Direct ownership of a building also means an investor can add value through active management such as increasing rents payable by a tenant or developing/refurbishing the property. Another alternative is managed office solutions, which provides an occupier with completely managed accommodation tailored exactly to their needs with a fixed price per workstation.

It’s essential to identify the hidden costs that tend to be overlooked include: agency acquisition advice, legal transaction fees, Stamp Duty Land Tax, overruns in fit-outs, project management, maintenance contracts, inflation, support contracts, general housekeeping, unused space, upgrades to the property and the costs of getting things wrong, such as employee numbers or installing the wrong equipment.

Acquiring all the necessary information to make the right decisions is time consuming and difficult, especially when a company has to consider the different strategy options and align these with their future plans. There is no fixed solution for businesses, but Michael Power, Professor of Accounting at the London School of Economics, who was interviewed for Portal’s white paper said: “Flexibility in commercial property strategies is essential. There is always the risk of onerous leases, either too long or with short notice break clauses and with more flexible working, office space capacity or empty surplus may be a risk.”


Richenda OldhamRichenda Oldham is the editor of Property News a digital UK regional commercial property magazine, which carries breaking news across the South, South West & Wales and the Midlands, as well as incisive articles written by leading commercial property experts.