Firms hire strategists to cut rents

Source : Business Times – 14 Jul 2009

Recession-hit companies are hiring specialist property strategists to cut their real estate costs and cajole lease concessions from embattled landlords as depression looms over the global property rental market.

Large-scale corporate occupiers are exploiting a ‘once-in-a-cycle’ opportunity to squeeze rents and improve flexibility of their letting terms at the expense of property owners, many of whom are battling to keep their buildings occupied against a tide of tenant bankruptcies and downsizing.

Experts at brokerage CB Richard Ellis (CBRE) said that cost-conscious occupiers are using a range of tactics to take full advantage of the weaker real estate market. Some are even threatening to relocate if their demands are not met.

‘We’ve been seeing much more proactive engagement by corporates who are looking at their current position at portfolio level, particularly seeking rental rate reductions and space savings in line with falling market conditions,’ said Matthew Pullen, head of CBRE Global Corporate Services in EMEA.

‘The savvy corporate occupier is looking at the landlord community and trying to understand the woes they have got, particularly around their finances and portfolio,’ he said.

Mr Pullen said that many corporations spent much of 2008 trying to survive, but 2009 has brought greater clarity on the actual cost savings needed to underpin their future operations. ‘What the corporates want, particularly in financial services, is to book savings this year and next. They are asking if they can do anything that might lead to quick P&L gains.’

Some of the most popular methods used include negotiating cheaper rents in exchange for a longer lease or rolling lease extension, additional rent-free periods, the right to sublet surplus space and the chance to buy exits from long leases. Mr Pullen said that CBRE had just completed a review of 350 leases on behalf of a global technology company keen to shave property costs. Some 20 leases are now being restructured, providing about five million euros (S$10.2 million) of annual savings.

The downturn in European property markets has so far been driven by falling capital values, reflecting reduced access to debt and growing risk aversion among investors.

However, as economies across the eurozone slow, brokers suggest that falls in rental values will usurp the repricing of real estate as the biggest concern for property owners.

Broker Knight Frank said that office rents in London’s City financial district fell to £44 (S$105) per square foot (psf) by end-June, from £46.50 psf at end-March – their lowest for more than 20 years in real terms.

Landlords are under increasing pressure to maintain the length and quality of their rental income, particularly in cases where they hope to sell up or have significant debt to service.

CBRE said that many property owners were therefore broadly open to discussions that could help secure continuity of income and avoid the uncertainty of re-letting.

Mr Pullen said that the downturn was stimulating profound changes in the way European corporates approached their real estate usage.