From Rents to Revenues: Can Property Become a Service Industry?

Citation

Devaney, S. (2003), "From Rents to Revenues: Can Property Become a Service Industry?", Journal of Property Investment & Finance, Vol. 21 No. 6, pp. 502-503. https://doi.org/10.1108/jpif.2003.21.6.502.1

The days when a UK landlord could simply hand over their building to a tenant and then wait for the rents to roll in may now be coming to an end. Landlords are coming under increasing pressure to offer their tenants more flexibility and services. This pressure is not just coming from occupiers, but also from the need to find ways of improving investment performance. So what will the consequences of this change be for the UK property industry?

This report examines the growth in service provision to tenants, the revenue opportunities that services present and the likely limits and barriers to expansion in this area. It considers some actual services that are being offered by the more innovative landlords and identifies different models of service provision that can be adopted. It also considers the valuation issues raised by the generation of both rental and non‐rental income from property assets. The research not only uses academic sources, but it also draws insights from interviews held with key market participants involved in both asset management and valuation.

The opening sections of the report set the pressures for change in the UK within a wider business and property market context. In particular, the growth of outsourcing, both in the property market and in general, is identified as a key factor. Many companies are seeking to focus on their core activities and outsource non‐core, but necessary, functions. Among these functions are the property and facilities management tasks. The report argues that, with privileged access to their tenants and buildings, landlords are well placed to take advantage of this demand. Another key factor is new technology, which gives landlords new ways of offering services and creates tenant demand for buildings with “connectivity”.

The report then looks at some potential sources of revenue for property owners. The options considered are facilities management, relocation and fit out services, bulk procurement, e‐procurement, broadband and the provision of back office functions. The interviews revealed varying levels of enthusiasm for these different options and the concern is raised in the report that some lie outside the core competencies of the property owner. Other barriers are also examined, as well as the various supply structures that landlords could adopt, such as direct service provision or partnership arrangements.

Two interesting issues that are raised are the motivations of property owners in providing services and the possible impact of service arrangements on liquidity. The report finds that many landlords who provide additional services do so for defensive reasons – to protect values and ensure their buildings stay competitive. Only a few do so with the deliberate aim of developing new revenue streams. Meanwhile, preserving the liquidity of a property is seen as very important and so any services provided need to be easily assignable to new owners.

The last main section of the report considers the implications of the growth in service derived revenues on valuation practice. At present, most commercial property valuations in the UK rely on evidence from the sale of comparable properties. However, if service revenues make income profiles more diverse, then it will become harder to compare assets. Therefore, more explicit DCF techniques will be required. Another issue that the report raises is the attribution of value between the property itself and the business opportunities created by it. This may be particularly difficult where a single charge is made for space and services or where services are used to enhance rental values and are not charged for separately.

In conclusion, the report suggests that demand for services will continue and so it will not just be the quality of a building that influences property performance, but the quality of the space/service package. However, it also notes that it is important to be realistic about the activities in which landlords will become involved. In many cases, the landlord is likely to act as an intermediary rather than as a direct service provider. Change is likely to be led by the quoted sector and the best opportunities for growth are in multi‐let buildings with small and medium sized enterprises as tenants. The report also suggests that, in the short term, valuers will adapt conventional methods to deal with these changes, but increasingly, DCF techniques will be used to estimate price.

From Rents to Revenues is a useful contribution to the property management and valuation literature, covering a variety of issues in some depth. Its strength is that it examines the growth in services from the perspectives of the property owner and valuer. However, while the focus is intentionally on these groups, it would have been helpful to have some material on the occupier perspective and their attitudes to landlords as providers. Some parts of the report are UK specific, but other parts, such as the discussion of business trends, have a wider relevance. Overall, the report is a readable and wide ranging treatment of this subject area.