Companies are re-engineering their property needs to meet new strategies. From CFO August 2003.
The one thing property tenants want from their landlords is flexibility. And landlords are starting to tailor property to meet the rapidly changing business strategies of companies.
Despite the drive to cut property costs, tenants are willing to pay a premium for the right office space. Jonathan Johnstone, director, Bovis Lend Lease, says tenants have been asking for flexibility in their buildings.
“They understand that if they wanted to drop off half of a shed because they no longer needed it, or hand back two floors in an
office building where they occupy four, it is not always very attractive from the landlord’s point of view.”
The advent of property trusts with a portfolio of leases has helped make the market more flexible. For instance, Macquarie Goodman has been able to take a partnership approach, thanks to its $2.8 billion of property under lease. The company takes a portfolio approach to its leases and is able to set renewals to ensure they don’t all come up at once, allowing flexibility with tenants.
Andrew Young, logistics group manager at the consultancy Sinclair Knight Merz, also sees the increasing demand for shorter leases, as many businesses working to five-year plans want to minimise their risks. He says: “[Companies] will commit to leases that will allow them to move premises at times that match business activity.”
As Johnstone says: “This is all about risk and managing risk, both from a landlord and a tenant point of view. In an ideal world, you want a good working relationship with your tenants. You want to hang on to them, then ideally you want to give them flexibility.
“The thing about property is that it isn’t a very flexible beast. You can’t just turn it on and off easily.”
Johnston believes property doesn’t – or shouldn’t – drive business strategy. “It needs to support business strategy, in the same way that you should have human resources,
financial and marketing.
“Property is very important to supporting it [strategy], but should never be a key driver to business strategy.”
Whatever the business strategy, the most important thing for a property is its location.
As David van Aanholt, chief operating officer of property trust Macquarie Goodman, says: “We tend to buy properties on a locational basis first, then in terms of existing improvements – the bricks and mortar – and then in terms of the lease covenant in place.
“Supply and demand and good location is what really drives your real estate investment.
“Seemingly good [lease] covenants can go bust. You really shouldn’t be buying the lease covenant. You should be buying the location, because if your tenant goes bust it is the
location that will drive it for you.”
Most industrial and commercial premises are built with a precommitment from a
tenant, which minimises the risks faced by the landlord, who can now offer flexible, shorter leases. This has led to the growth of business parks orbiting Australia’s main cities.
In Sydney, government investment in new road networks is opening up the region’s
demographic heartland. It is helping fuel the rapid growth of business parks as locations.
Such was the case for Fuji Xerox, which in September will move its documents and supplies division to a new facility at the Campus Business Park in Homebush, owned by
Macquarie Goodman.
Michael Wilson, national supplier manager of Fuji Xerox, is responsible for the company’s property in Australia, covering 22 leases and 60,000 square metres of floor space. Its main bases are in Sydney and Melbourne.
There are several reasons for the move to Homebush, Wilson says. “Partly, it is a result of more business west of Sydney, but it’s also looking towards getting more business out west in future. So it’s basically saying, ‘Let’s be in the demographic or near the demographic heart of Sydney, and be right where all the transport routes are so we can easily access our customers throughout Sydney’.”
At Homebush, the company has access to Sydney’s new roads that open up the whole of Sydney’s customer base. As Wilson says: “You tend to do business where you are.
If you’re in the eastern suburbs, you do business there; if you’re in the heart of
Sydney, you have a broader perspective.”
Fuji Xerox is typical of many companies that are looking to become physically closer to their customers and suppliers and other stakeholder groups. At the same time, it has a sharp eye on business costs. “We are always looking at opportunities and testing the marketplace,” Wilson says. “Every time a lease comes up we will have a look at what that lease has got. We judge it on its merits.
“We look all the time to see if we are optimising our facilities from a cost point
of view, but the quality of facilities is also important to us.”
Sinclair Knight Merz’s Andrew Young says companies are looking to be both lean and agile in their supply chains.
“Decisions in this area often have a profound effect on property acquisition and location decisions. Organisations today face turbulent markets with short product life cycles and volatile demand,” he says.
Most organisations want large, centralised facilities, typically in Sydney or Melbourne, with good access to ports and major arterial rail and road links, he says. The location of the property is important in, for example, being able to guarantee next-day delivery for orders from adjoining states. Another driver for property requirements has been falling inventory levels. According to Young, companies that master their relationships with customers and suppliers are re-engineering their space requirements. They are moving away from storage facilities towards facilities designed for the rapid turnaround of product.