Corporate Real Estate

1
Corporate Real Estate Investor view implications
of the change in user preferences on investment
strategies

• Nick FrenchProfessor in Real Estate
• DTZ Fellow in Commercial Property
• Department of Real Estate Construction
• Oxford Brookes University

2
Agenda

• Rents and Leases
• Investment Strategy UK/ Europe
• Existing Portfolio
• New Acquisitions
• What is happening out there ??
• Conclusions - a change of sea level

3
Rents and Leases

• UK Leases changed in 2000s 15 years with 5
  years upward only rent reviews for HQ buildings
  only
• Most UK offices are between 5 and 10 years and
  with the latter, a 5 year upward only rent review
  but many are now with a break clause.
• Rents are falling dramatically

4
The Advsiors - Observations

• A Pilot Survey of 22 Property Management
  Departments in London was undertaken in May 2009.
  The response rate was 50 (11/22)
• The respondents were asked to comment on what
  activity they had observed in the UK Office
  market since summer 2008
• The relationship between Landlord and Tenant was
  examined.
• The results are indicative but we hope to analyse
  an occupancy database at DTZ to provide empirical
  evidence to add to this qualitative study

5
Survey Results
Total number of respondents 11 YES NO
Have you seen an increase in the activation of break clauses by tenants? 11 0
Have you seen an increase in Sale and Leaseback Activity? 9 2
Are Landlords waiving rents where tenants are in distress? 9 2
Are Landlords willing to consider surrender and renewal for longer leases at a lower rent? 7 4
Are Landlords willing to accept surrenders for capital payments? 6 5
Are Landlords talking to their tenants more? 11 0
6
Survey Comments

• All respondents have indicated that both parties
  are more willing to negotiate.
• Landlords have been struggling to raise capital
  with banks not providing new capital and worried
  about loan/value ratios based on revaluation
• Tenants are wanting to rationalises their
  portfolios operating breaks and trying to lower
  rent roll.
• Landlords are wanting longer cash flows

7
The Investor Existing Portfolio

• Cash flow, cash flow, cash flow has become
  negotiate, negotiate, negotiate
• The requirement for cash to has meant that many
  landlords are accepting side agreements not to
  demand the full rent or amending the payment
  schedule
• Surrender and renewal, surrender for capital and
  consolidation/contraction

8
The Investor Relationships

• Landlords are being much more receptive to
  discussions. In the current downturn, they want
  to maintain cash flows even at lower levels. They
  are being flexible if occupiers TALK to them. But
  will resort to legal protection if no dialogue.
• Landlords are open to a myriad of solutions to
  ensure that cash flows are maintained or capital
  recouped.

9
The Investor New Portfolio

• Reluctance to buy new assets as the pricing of
  risk is difficult
• Distressed Tenants
• Rental Decline
• Covenant Strength
• Banks paranoia
• Some equity investors are considering sale and
  leaseback for long cash flows (10 years ) with
  top covenant. But priced accordingly

10
The Investor - Aspirations

• Location, Location, Location became covenant,
  covenant, covenant but it is now cash flow,
  cash flow, cash flow
• In the last six years (2002-2008), investors have
  looked to capital return as the main contributor
  of total return. They are now looking for secure
  income or capital realisation.
• Problem of pricing risk today

11
A cahnge in sea level?

• The current world economic climate is uncertain.
  The credit crunch has led to occupiers rethinking
  their RE strategies.
• At the same time, tenants are fire-fighting to
  keep their occupation costs at a level that will
  allow the companies to survive.
• In this market, more than any other, tenants are
  approaching landlords with the idea of
  renegotiating there rental liabilities.

12
A cahnge in sea level?

• Landlords are considering each proposal on its
  merits and solutions are ranging from
• side agreements that dont demanding full
  payment
• Surrender and renewals to provide a more even
  cash flow
• Outright surrenders with a reverse premium being
  paid

13
A cahnge in sea level?

• The booming investment market of the last few
  years has shielded the profession from the need
  to consider fully the role of proactive
  management
• Good relationship management and a foresight to
  negotiate to protect future cash flows means
  that, now more than ever, management surveyors
  can enhance and protect capital values

14
Conclusion Change of Sea Level

• Landlords and Tenants are at a crossroads.
• Negotiations and discussions are appropriate and
  required. The reliance on the lease has passed
  cash flows will come from client management
• Opportunity for corporates to reorganise there
  space requirements in new and existing space.
  Transition period