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Emerald Group Publishing Limited
Copyright © 2008, Emerald Group Publishing Limited
Interview with Howard Cooke (Director, Corporate Consultancy, GVA Grimley Ltd)
Article Type: Talking heads From: Journal of Corporate Real Estate, Volume 10, Issue 2
by Debbie Read
Can you briefly explain your day-to-day role at GVA Grimley?
It is split into two parts. The larger proportion is in working with corporate occupiers on issues and problems they face. So I get involved in a very varied range of jobs. Over the last 12 months, I have worked on a wide range of projects. This includes the surrender on a major leasehold liability which took over a year to structure and complete, and with the credit crunch I did wonder whether we would ever do. There was the restructuring of leases a client held on a West End office building, which provided a substantial rent free for the client. A lot of work comes on surplus property and that entails FRS12/IAS37 assessments and then the strategy for disposal at a property and a portfolio level. With the changing market conditions there is more work on portfolio strategy for businesses. Each day is different. However, they form a mixture of meeting clients to discuss projects and issues; working with colleagues on specific projects; putting together reports on the project and then negotiating with landlords and agents.
The second part is the marketing of corporate consultancy and GVA Grimley. That ranges from writing a monthly newsletter that goes out to clients and contacts it looks at what the current factors influencing corporate occupiers are. I also write articles for journals and lecture. We also do research pieces and in particular I am involved in the CBI/GVA Grimley corporate real estate survey, which happens twice a year. So there is the setting of questions, analysis and the writing alongside colleagues at the CBI, and allied to that I sit on the London Region Council at the CBI. On top of that there is the making of proposals to potential clients for work, the bulk of which comes from people who know us and want to work with us.
How does your role at GVA Grimley differ from your previous experiences as managing director at Fraser CRE?
Fraser CRE was set up primarily to focus on surplus leasehold properties and the management of the liability portfolio for occupiers. This meant that my focus was on that one specific area and a lot of my time was spent on property management and people issues. Fraser CRE had one office and everything happened within that office. GVA Grimley is considerably larger with 1,200 people in 12 offices around the UK. That gives me direct access to people who know about the various markets and specialists in a wide range of fields such as project management; party walls; telecoms; etc.
The range of clients that I am working with at GVA Grimley is much wider than at Fraser CRE. One of the main appeals to me of working for corporate occupiers is that each one is different, even if they are in the same business sector they have different drivers and requirements. Getting to know the client and their business is always fascinating. As property is never the primary driver the challenge is putting the property issues and solutions into the business context, and with that the operational and financial factors that drive the business forward. That means there is always something to learn and it can never be about trundling out the same solution that was used for someone last week. Each client is unique and so the solution has to be tailored to that clients needs.
You have written the Corporate Occupiers’ Handbook, which provides a practical guide to the issues faced by those in corporate occupation, such as new and existing legislation, lease renewals and legacy portfolio issues. Can you expand on one or two such issues and how you would deal with them?
In the early 1990s, I came up with the concept of the Handbook of Property Management which covered the broader subject of managing property as landlord or tenant. That was a loose leaf publication and I brought on board seven or eight specialists, to work with me and the book was published but never really gained critical mass, not least because of the price and after a few years we stopped updating it. However, I felt that the occupier part of the market had unique attributes that did not get the appropriate attention and so the idea of the Corporate Occupiers’ Handbook was born. To give it the broadest possible scope Simon Woodhead, a Barrister, joined me in writing it, so there is considerable legal content in the book reflecting the complexity of the UK property market, but making it useful for surveyors and solicitors alike.
A large part of my work over the last decade has been in dealing with legacy portfolios and trying to mitigate the effects for the corporate occupier. There is no easy solution to the problem, it is one of hard grind to dispose of the vacant space and then manage the sublet portfolio. I have been involved in various ways with legacy portfolio disposals, which is basically paying someone to take on the whole portfolio, thereby removing the problem from the corporate occupier allowing them to focus on their core business. This is not an easy solution because there are so many hurdles to overcome, although the property aspects are usually the easiest ones to solve. One of the primary problems is the lump sum payment that the occupier has to pay allied to the structuring of the credit enhancement model that provides the corporate with a degree of security that the leases will not find their way back to the company. We have created a solution to this which will provide the corporate with an alternative structure.
The other area is break clauses. Simon and I have done a lot of work together for clients in this and it is an area that I enjoy because of the intellectual challenge they pose. It is one that I still get frustrated over because of the number of leases that you come across that prevent corporate occupiers from having the flexibility they thought they had because the break clause has a number of conditions that are attached to it, which prevent them from exercising the break.
The key to dealing with this is planning well in advance. Too often occupiers leave it too late before they start looking at the break clause conditions and developing the strategy to ensure they can get out of the lease. It might sound a lot but two years before the break is a good time to start the process, and that means getting the right legal input at the start. It is a specialist area and I believe it is money well spent getting the view of a counsel who specialises in landlord and tenant, for anything that looks like it applies conditions to compliance. Last year, I dealt with one when the wording was such that the occupier had to pay the full quarters rent even though the break was on the first day of the quarter. My strategy is always to run parallel lines of trying to agree a surrender with the landlord, which will obviate any need to comply, but the fallback is to ensure that there has been compliance with the lease terms. This usually centres around dilapidations and reinstatement, and payment of monies. The hardest aspects are to get the client to move people and equipment out to give sufficient time for the building works to be carried out and secondly to recognise the effects of the failure to break. In particular, paying slightly more than the assessed liability for surrender is good value compared to the impact of failing to break and being left with an onerous lease.
GVA Grimley and the CBI have run property trends surveys for many years looking at the general trends of property. Regarding your winter 2007/2008 survey, what made you decide to focus more on the current key drivers for business and their affect on the management of the property portfolio?
The interface between property and business is always a difficult one. Property has generally been seen as a cost by decision makers and as a consequence the corporate real estate manager has struggled to get the management team to look at property in any other way than as a cost to be cut. As the CBI/GVA Grimley Survey primarily goes to business people, not property people it allows us to try and raise the profile of property within business as well as show property people what the key drivers are for business. Too much of the property business is about the investment and letting market, and too little about the people who pay the rent, so it is an opportunity to raise the profile of the occupier side of the market within the property industry.
The issues that corporate occupiers face are many and varied. Identifying the key drivers is a challenge, not least because they evolve over time. The focus at present is on profitability and cost reduction.
In the CBI/GVA Grimley Corporate Real Estate Survey, it was revealed that “a fifth of companies would consider relocating their business from the UK”. From a real estate perspective, what are the key issues that should be considered when a company is looking to relocate?
With any relocation the issues that need to be considered are primarily business ones, with the pure property aspects coming second. However, the property aspects can have a big impact on the decision-making process. If the property held is freehold then the questions are around the realisable value that will be obtained post vacation and maximising the benefits that will be gained from the site. That will entail considerations on whether to sell as it or to try and improve value by creating potential schemes and making planning applications. Is it best to undertake something in partnership so there is an upside when the development is completed, etc. Or it may be a simple sale to another corporate in which case how is that dealt with.
Arguably matters are slightly more complex with leasehold property because of the ongoing liability that might result. At the simplest level it could just be a matter of dealing with dilapidations on the expiry of the lease if the lease expires in the short-term. For leases that have some time before they expire the strategy for disposal needs to be developed and the impact of the FRS12/IAS37 provision taken into account with the overall assessment of the project.
For the space that the business is going to occupy there are issues to consider around the structuring of the lease. For freehold and leasehold the whole question of the fit out and how that is to be procured, etc.
Across border moves add to the complexity of the overall transaction.
Another finding from the survey is that “half of businesses have yet to consider the impact of the introduction of Energy Performance Certificates (EPCs)”. What exactly do these certificates entail, and, in your opinion, what impact will they have on businesses?
An EPC is a means of recording a building’s energy efficiency (measured in CO2 emissions) by colour coded scale (A-G). EPCs are to be accompanied by a report containing cost effective recommendations to improve the building’s energy rating, although there is no obligation to comply with these.
They are to be phased in:
6 April 2008, all buildings over 10,000 m2 new to the market.
1 July 2008, all buildings over 2,500 m2 new to the market.
1 October 2008, remainder to the lower limit of 50 m2.
The EPC, once obtained, is valid for a period of ten years.
Responsibility rest with the supplier of the premises. If it is a new build it will be the developer or landlord. For a subletting or assignment it will be the current party responsible, the tenant. Government guidance states that a landlord may organise an EPC for the whole building, and therefore costs may be recoverable under the service charge.
EPCs are not required in the following for lease renewals, lease restructuring, unless the space is refurbished, or surrendering.
Some of the initial thoughts suggested that it will not affect corporate occupiers in the short-term because they would not be the supplier. However, that ignores the fact that once a corporate wants to dispose of any space other than as a surrender they will have to provide EPC’s. That means that it will be another factor to resolve as part of the process of bringing the space to the market.
As of April 2008, the government scrapped the 50 per cent empty rate relief from which non-industrial firms could benefit three months after a property has become empty. What do you think the effect of such a change will be?
The change to the rating relief is having a big effect. As you say the 50 per cent relief has gone for the non-industrial users, but the bigger hit is that the 100 per cent relief has gone for industrial units.
The immediate effect is that the monthly cost of surplus property has gone up now that the corporate has to pay another 50 per cent or for industrial space from 0 to 100 per cent. At a time when the economy is looking fragile that is an immediate impact on the cashflow of a business. However, that is only part of the story because a company needs to provide for surplus leasehold properties under FRS12/IAS37. So the loss of relief means that the FRS12/IAS37 provision will need to increase to reflect the increased liability, so that increase in provision will take effect at the end of the reporting period for the company. A number of our clients had already factored in the increase, and no doubt over the next 12 months all companies will address the issue.
It is clear that the government has not thought about the impact this tax is having on corporate occupiers who are carrying the costs of surplus space – query FTSE piece.
Part of the rationale given in bringing in this tax is to make more space available and stop landlords hoarding space. This does seem a somewhat dated concept, the letting of centre point, where this happened in the 1960s, does seem to be casting an exceptionally long shadow. I believe that there is a strong possibility that this will totally back fire, as landlords will not want to have the additional holding cost until they find a tenant and as such new developments will be driven by pre-lets and there will be much less speculative space. That will then reduce the options for tenants, the reverse of the stated aim.
You have previously mentioned that “while recession has started to cross people’s minds, if not their lips, in the UK, one other term making a re-appearance is stagflation”. Can you explain what you mean by this and what impact you think this will have on corporate real estate?
Stagflation is low growth but high inflation. We are continuing to see inflation in the UK and Europe impact on the interest rate policies of the Bank of England and the European Central Bank, as inflationary pressures continue to push prices up. The debate on the US economy is whether it is in recession. The IMF has cut its forecasts to show a 0.7 per cent contraction in the USA by the fourth quarter, but as yet the USA has not had two consecutive quarters of negative growth. Unemployment in the USA is rising, with a jump in March to 5.1 per cent, and inflation is running at 4 per cent so overall the US economy is not looking good. The UK is seeing its economy slow, with rates of growth revised down to a range of 1.2-1.9 per cent, but employment remains very strong which could help the UK avoid the worst effects. Europe continues to struggle with inflation, for March it was 3.6 per cent and there are a number of structural difficulties for some of the countries in the Eurozone. Italy for example, has a population profile that is becoming very skewed with a lot of people coming up for retirement and few people coming into the workforce.
The effect of stagflation will be to put businesses under pressure as they will be fighting to cut costs whilst struggling to increase turnover. For some businesses these pressures will be too much and we have already started to see profit warnings, especially in the retail sector, and for some this will lead into collapse and the winding up of the business. As a consequence, a lot of businesses will look to off load costs and that will mean property, so the supply of property on the market could increase. That sounds rather pessimistic, but to my mind it is just part of the economic cycle and we are due a move to a more negative environment. That will also offer lots of potential for those companies that are fleet of foot.
The impact of problems in the US economy will be felt across the world, although probably less than it would have been in the past. The strong links between the USA and the UK will probably see the UK being more adversely affected than others, one only has to look at the financial services sector to see the impact.
In Chancellor Alistair Darling’s first budget (March 2008), he called for new non-domestic buildings to become “zero carbon” from 2019. What is GVA Grimley doing to ensure that it is a socially responsible organization?
There are a number of actions that are taking place in the company. This ranges from involvement in land aid through to specific initiatives around “Green Issues”. GVA Grimley has joined the UK Green Building Council and become part of the organisation that is bringing clarity, consistency and leadership on sustainability to the property sector in the UK. The firm’s decision to join the UK Green Building Council is part of its wider commitment to the environment and coincides with the firm’s current application to achieve the environmental management system standard ISO 14001.
How does GVA Grimley remain committed to strong corporate governance?
Since becoming a limited company our commitment to good corporate governance has increased, in that we now have external experienced directors on the board and have appointed our first non-executive chairman who comes from a background of having chaired major companies and so is familiar with both the spirit and the letter of the requirement for good corporate governance.
In your opinion, what is the single most serious concern facing real estate investors today and why?
Overall, I think it has to be maintaining asset value. There are a number of issues for investors at the moment including the availability and cost of finance, but the value of the assets is to my mind the biggest challenge. Having worked through the collapse in the property market at the start of the 1990s the focus then moved fairly quickly to trying to slow the drop in value by being proactive in managing property. From where I am sitting there appears to have developed a wide spread complacency as the compression of yields has meant that asset managers have not had to work their portfolios to perform, it has happened without them. That is no longer the case and they will need to work hard to slow the impact of the softening of yields, and that means they should start trying to have sensible dialogues with their customers, the corporate occupier, so that they can add value to their portfolio. The smart ones started last year and one of the bigger deals I was involved in was working with an investor to restructure leases on a large West End office building to give them certainty of income and remove the risk of a large void at the time when the market cools.