TwentyTwo's Chris Ware on what you need to consider before you start looking at property options, to ensure you get the best outcome for your organisaton. This article was first published in The Dominion Post.
With interest rates at record lows stimulating an already buoyant commercial property market, if you are looking to invest - take a step back first.
Investing in new premises, be it office, retail, industrial or special-purpose, is one of the most important strategic investment decisions a business can make whether the preference is to own or lease.
It is easy to get caught up in the momentum of a buoyant market. Shorter lead times for decision making and an often exaggerated extent of competition for space, may influence your thinking.
So how do you make sure you are making the right move and applying the appropriate level of due diligence and financial acuity?
Is it a strategic fit?
Chris Ware, Associate Principal at TwentyTwo says it starts with understanding property’s uniquely multi-faceted role in a business.
“Obviously, property has a significant financial impact. If you own property, it ties up capital and debt in a key asset. The asset may appreciate over time, but ownership comes with inherent risks and obligations such as maintenance and compliance. The capital invested may also be more effective funding core business rather than bricks and mortar.
“Equally if you lease property, both the annual operating costs and the annualised capital investment in fitout generally rank as the second or third largest line item on the P&L. The new accounting rules also mean it sits on the Balance Sheet as a significant liability.”
The broader opportunity
“Property plays a wide role as a key influencer and enabler of business strategy and operations”, says Chris. It ‘touches’ a number of elements of the business plan:
- How your brand is expressed and perceived.
- How you engage with your customers and their experience with your business/organisation.
- Your employment brand and your ability to attract and retain key people.
- How your people work, interact and ‘experience’ the workplace.
- How you foster innovation and creativity.
- How you implement change and transformation.
“So, the first question that needs to be asked is how does this investment decision support our strategic goals?”
Linking investment and business strategy
Chris says that too often leadership rush into decisions and project implementation mode without understanding ‘why’ and ‘how’ this initiative fits.
“A key part of our process is taking the client back upstream to make sure they understand how any property initiative fits. This allows us to ask the right questions of the right people in a challenging yet constructive way. We can then help develop a more robust brief and evaluation framework to ensure we can consider the property options in play through both a strategic and operational lens.”
“Linking your planned investment back to your business strategy is the ultimate test. It’s no point getting a great deal on something that you don’t need or that doesn’t fully support your business, its forecast growth and change aspirations.”
How to get a good deal
If you are leasing, getting a great commercial outcome is driven by three primary decisions:
- How you manage your initial briefing and options evaluation process. It’s important you understand the full picture and total costs and obligations for each option. So be clear on what you are looking for, undertake thorough due diligence and compare the options on a like for like basis.
- How you engage with the market. Actively engage with the market to ensure you cover all options and create competitive tension. Simply getting a database dump from a leasing broker (if leasing) and sifting through the long list takes the control of the process out of your hands and means you may not get all the options or full market insight.
- How you negotiate the final terms. Ensure you have a market benchmarked deal, appropriate incentives, a well-developed scope of landlord works and tenant-friendly lease terms. Relying on the broker and legal adviser alone is unlikely to get the best outcome.
As Chris points out, it’s important not to lose negotiation leverage. “We’re often asked to develop a ‘negotiation strategy’ to then find the client has already been out in the market, talked to various people, outlined their exiting lease position and their time constraints!” says Chris.
The best deals are done when there is plenty of lead time, the strategic conversations are had and alignment confirmed. It is critical to have a thorough procurement and negotiation strategy in place and that it is executed with the tenant and their team in control of the process, information release and decisions. The same principles apply to purchasing.