Changes in realty market forces landlords to revise strategies

Changes in realty market forces landlords to revise strategies
The Financial Express, December 22, 2009, Page 12

Sajan C Kumar, Chennai

With the rapid changes in real estate market cycles triggering pressure on tenants, landlords have been caught in a bind, grappling to minimise any negative impact on their investment. Since tenants will use the prevailing economic conditions to leverage better deals and incentives that may not have been available previously, a good defensive strategy that involves understanding the market, optimising the lease expiry profile and effectively engaging with the tenants should be deployed by landlords, says a recent research paper by global real estate consultant Jones Lang LaSalle.

There is also a downward pressure exerted on rental rates when tenants move to accomodations that are more cost-effective or re-negotiate their current lease terms. Tenants are negotiating with landlords in a number of areas, in an effort to reduce their real estate costs and increase their flexibility.

According to the research paper, a good defensive strategy involves a detailed analysis of the market in order to understand its dynamics and individual nature. The analysis should consider not only what the markets look like today, but also what it might look like in the future. The key elements of preparing the strategy are, understand the market, including the tenant base (what they come from and the impacts on their industries) and how brokers operate in the market.

Also, it is important to review one’s current lease expiry and determine what is the ideal weighted average lease expiry for the asset or portfolio.

Identifying the best and worst spaces, understanding what made these spaces the best and worst, and looking at ways to maximise their attractiveness is also crucial. The paper advises landlords to engage both with their tenants and potential tenants. The paper adds that forecasting potential market conditions will help identify the best mix of offensive and defensive strategies in order to maintain asset value over time. A good strategy when negotiating rentals is to ask about and see their comparables. Moreover, rent review decisions may have a significant impact on future cash flow.

Deciding when to time the lease expiry profile will depend on the landlord’s appetite for risk and how far ahead in the future one can credibly forecast the market.

Timing the majority of the lease expiries to occur in a single year can result in the maximum benefits if one manages to pick the pick rental period. However, one can also be exposed to the maximum downside, should it arrive at the bottom of the rental cycle. Alternatively, spreading the lease expiries evenly across five years may not yield the maximum returns, but it will enable the landlord to spread the risk and ensure that he ends up with average returns during the period.