General

Winter is coming...

NG has enjoyed another successful year operating in the East Midlands commercial property market, with the company expanding and new talent being attracted to the business.

There’s no doubt that 2022 has had its challenges – not least from Westminster, but how do our four directors believe 2023 will play out? We asked Richard Sutton, Jude Weston, James McArthur and Paul Rogers how they see the next 12 months.

Richard Sutton, Managing Director says he doesn’t think anyone could have predicted the political and economic events of Q3 2022 – and it may be hard to predict the next 12 months in property terms, but what he does know is that it shouldn’t all be doom and gloom.

“Property on the whole has proven itself to be reliable once again, far more so than stocks, shares or government bonds – or even Prime Ministers!”

For Jude Weston, director at NG, 2022 has been the busiest year of her professional career, which is mainly due to the increase in large scale management instructions NG has secured. Despite the general uncertainty in the market, and wider economy, the appetite for properties to be professionally managed seems as buoyant as ever.

“A good Asset Management Surveyor is required to roll their sleeves up, get stuck in, take the 7pm calls, constantly problem solve, be proactive whilst maintaining a delicate balance between all parties – a professional mediator! There are therefore very few of us willing to give it our all”

James McArthur, director, believes that after navigating the complexities of commercial property management through the Covid 19 pandemic it would seem that the next 6-12 months is going to be just as challenging.

James said: “The utility crisis is already having an impact on tenants, once again this is going to hit landlords hard, as tenants start to delay rent payments or default and properties will become vacant, deserted and, ultimately, more challenging to let.”

Despite this, says Richard, construction costs seem to finally be levelling out and that occupier demand is still fundamentally strong, both on freehold and leasehold terms.

He added: “We have a small firm that operates in a relatively small geographical area, and this is our strength. Our comments can and will only relate to the areas we cover. Rents don’t seem to be going down and prices don’t seem to be falling and   the constant talk of recession is counter productive  and will impact differently in each property sector, but there seems no need to panic.”

Paul Rogers, director at NG, heads up our Building Consultancy, says the cost of living crisis and in particular the significant increase in energy costs has brought forward the need for landlords and investors to improve the energy efficiency of buildings.

He said: “There has been an increase in business and investor demand to decarbonise properties to reduce energy use and help mitigate increased energy supply costs. The change in Minimum Energy Efficiency Standards (MEES) will continue to focus landlords and investors minds during 2023. We expect to see an increase in refurbishment of properties, particularly at lease end . We will continue to assist clients to identify MEES improvements and how these can be best incorporated within life-cycle works to their properties.”

For investors, Richard says the pricing and the availability of finance will, as they always have, play their part.

He added: “Capital growth is one of the biggest obvious advantages of investing in property. The investment market for quality opportunities is still really strong and the attraction of rental income can be just as important as capital growth.

“We now have a Prime Minister who genuinely understands business and should guide our economy through the next 12 months  without any more embarrassment.”

But will that be enough to save the smaller firms who are struggling right now? James is unsure.

He said: “Winter has not fully arrived yet, but already noises are being made about how small retailers are going to survive. We have already had lettings of small retail units fall through as the end user couldn’t afford the utility costs .

“I also had a tenant notify me that he is being forced to close as his monthly utility costs have increased from £400 pcm to £2,700 pcm. That is a cost of £32,400 per annum, on top of rent, rates, wages. They are going to have to sell a huge amount of coffees and muffins to stay open, it’s not sustainable – more like impossible. The government will have to do something to resolve this crisis. The current proposals do not even scratch the surface of the issue but perhaps that is rant for another time.”

Paul said that general building cost increases have caused some occupier clients to reconsider projects, while others have decided to complete these now to protect against future cost increases.

He said: “Where Reinstatement Cost Assessments (RCAs) for building insurance purposes have not been reviewed for several years, these may now be insufficient. Indeed, when completing recent RCAs, we have found a number of properties to be significantly undervalued leaving owners exposed to costs in the event of an otherwise valid insured loss.

“Occupancy rates for offices are expected to fluctuate again with new models of hybrid working now becoming the norm,” he said.

“As occupiers re-evaluate their requirements, we prepare notional schedules of dilapidations to inform them of the potential cost of exiting their leases and the most efficient strategies for doing so.”

Paul believes it is crucial that landlords ensure that a Planned Preventative Maintenance (PPM) programme is in place so that the costs of repair and maintenance are re-covered either by service charge or all-inclusive terms in the rents to avoid the risk of exposure to increased dilapidation costs when leases end.

He said: “Occupiers will be reluctant to settle dilapidation claims where buildings could be repurposed to suit a changing market or significant improvement works undertaken to achieve MEES.

“It is important that the schedule of dilapidations accurately reflects the landlord’s intentions to avoid delay in settling claims. We work closely with landlord clients and agency colleagues from the start to achieve this desired outcome.  Conversely, when acting for tenant clients we have successfully reduced landlord claims by up to 80% where a landlord’s intentions haven’t been correctly understood and or represented.”

He added: “Essential repair and maintenance works are often now being neglected by tenants over competing business needs and we are seeing an increase in landlords using repair notices as useful tools to either encourage tenants to undertake works or enable landlords to complete and recover these costs as a simple debt claim, saving the landlord time, money and the uncertainty of proving a damages claim.”

So, a mixed picture. Navigating the way through this complex environment ensuring clients’ precious assets is Jude’s day job, but, she admits, it’s not an easy one.

She said: “Perhaps that is why, as we move into 2023, we will continue to be very busy with new work as clients focus their attention on their ‘day job’, putting their properties into the skilled hands of our Asset Management team.

“It will become more challenging to collect rent from tenants, as cash flow becomes more and more important to ensure businesses survive. There will be more queries raised by clients and tenants regarding financial commitments, and a tighter squeeze on ensuring financial efficiency within the wider management of properties.

“Certainly I believe we are set for interesting, if not more challenging times.”

James said there are going to be difficult  discussions to be had with tenants and landlord clients over the next six months.

“It will not be fun, but once again communication is key,” he said.

“Speak to your managing agent if you are a business that is struggling, don’t bury your head in the sand hoping it will blow over, it won’t. Believe me, landlords want their properties occupied and therefore early and regular discussions are required to work through the issues. However, the answer is not to come to the landlord and request rent reduction. It wouldn’t be well received as they will be impacted just as much.

“One of the biggest issues is that companies do not have cash reserves that help them navigate these uncertain times. When forced market changes happen that create these increased costs or uncertainty, they are unable to find the funds to get them through the difficult periods.

“If Covid has taught us anything, then businesses/tenants should have been putting in away ‘disaster funds’ and if they haven’t – why not?! Maybe that’s just me…”

Richard is pragmatic. He said: “The market in 2023 may not be as spectacular as it was in 2020-2022, it feels more like we could be looking at trading conditions similar to 2018, and, if we are, I’ll take that…”

Whatever 2023 brings, there are things to be learned.