Relocation UK 2009: Is now the smart time to relocate?

There are great terms to be had from landlords, and bargains to be driven by bold firms that think ahead...

by Ian Wylie
Last Updated: 09 Oct 2013

Just as homeowners have been forced to sit on their hands for the past year and more, business relocation activity in the same period has slowed significantly. In an extremely trying economic environment where many companies have been chalking up low profits or big losses, the name of the game has been survival, through contraction, redundancies and cost-saving.

According to a survey conducted by property services group Savills, 82% of businesses have opted to renegotiate lease terms rather than relocate as a preferred method of reducing their costs. In fact, the research suggests that business relocations reduced by as much as 46% in the first half of 2009. Explains Patrick Joynson, head of Savills' office agency in Manchester: 'Tenants who are on a long lease are often responsible for sub-letting existing premises, and even run into the danger of being charged "empty" rates if they don't succeed in disposing of their existing premises.'

Yet in spite of this lack of movement, companies are beginning to plan for the future and consider their location options, says Laurence Johnstone, a director at commercial property agent Jones Lang LaSalle (JLL). 'We're engaged in a number of relocation feasibility studies that are driven for a variety of reasons. Some are lease-event (break-clause) driven, but a few are with expansion in mind. However, given the uncertain outlook, many are delaying decisions.

'So, in the current environment,' he adds, 'many companies are seeking to take advantage of lease breaks and expiries that enable them to obtain lower rents and/or rent-free periods.'

So what would Johnstone advise? 'It's very important not to leave the approach to the landlord too late,' he says. 'The landlord needs to be approached not less than 18 months ahead of the break date.'

In some instances, he explains, JLL has been negotiating early lease surrenders to enable companies to consolidate into less floorspace. 'A careful look at accommodation needs is essential,' he cautions.

Andrzej Narkiewicz, senior consultant at Mercer, responsible for advising companies on business relocations, has also observed a slow-down in business relocations over the past 12 months. 'Relocating a company or sizeable business unit is an expense that can run to a couple of hundred million pounds, and the financial crisis has made access to money much more difficult than it was a year ago. So decisions to postpone or stop relocation processes have been commonplace.'

The trend has been most noticeable in the financial, metal, chemical and automotive sectors, he notes, which in turn has affected suppliers such as glass and tyre manufacturers. 'We've seen some large financial institutions halting relocation processes and even selling off their newly created shared-service centres. However, we have already observed a slow improvement and expect relocation activity to pick up again soon as companies seek cheaper, qualified labour.'

The fall in demand from occupiers represents a significant opportunity for businesses prepared to relocate. Stiff competition among landlords means rent-free periods are now as much as two years when taking a 10-year term, says JLL's research, which has led to a marked fall in net effective rents in offices in the UK's biggest cities.

The study suggests, for example, that although the Midlands and South West England have shown more resilience in headline rents, they are offering significant incentives to attract tenants. Similarly, in North West England, rent-free periods now stand at between 30 and 36 months, on average. 'Something else to bear in mind is that most locations are seeing zero new-development activity,' says Johnstone.

'For as long as these conditions prevail, the opportunity is there for occupiers to drive a keen bargain when taking a new lease. However, that doesn't mean, of course, that all locations are well supplied. Suitable premises for relocation needs must always be identified by a close review of the location in question.'

So where do you begin that review? 'Build an objective model for comparing all locations based on the same data and criteria,' suggests Narkiewicz. 'But don't rely on data only, as it may not reflect the reality on the ground.' Things have shifted quickly in recent months, and last year's data - even last month's - may be significantly out of date. 'Over the next six months, avoid taking a short-term perspective that risks being distorted by the immediate effects of the recession. Instead, take a long-term view based on the prospects for growth.'

You must also develop a proper understanding of your own business needs before starting a relocation search process. Says Johnstone: 'All too often, the search is started before the company has properly thought through why, what, how much and where.'

Value for money should be measured not so much by the cheapness of a rent as on what value a region or city can offer by way of its labour force and other amenities, argues Joynson at Savills. 'Staff salaries, skills, availability and loyalty should be considered and are far more important to the success of an office.

'Although it is an employers' market at the moment,' he adds, 'this may not always be the case, so to minimise costly staff churn and maximise staff productivity, consider well-located, good-quality buildings that attract and retain the best staff.'

There is little doubt that cars as a means of staff transport are going to become more expensive and less attractive, points out Joynson, so you should look to city centres that can offer a multitude of public transport alternatives.

Get a good understanding of the landlord and their position, urges Johnstone. 'Find out what are the important, and less important, issues for them and what are the tenant-friendly add-ons they can introduce into the deal. Are there any elements that the company can offer the landlord that they will find attractive or unattractive?'

If capital expenditure is a problem, Johnstone suggests placing the responsibility for this on the shoulders of the landlord - for example, getting them to undertake the fit-out or to make a capital sum available for this.

And don't just focus on the headline figures. In the current market, there are other valuable aspects that can be negotiated into new leases, such as the removal of unhelpful preconditions on exercise of break options, tenant-friendly alienation provisions (ie, sub-letting and assignment), and favourable rent-review clauses.

You can reduce your liability to upfront Stamp Duty Land Tax (SDLT) by securing an option for a further term. Less SDLT is payable for a five-year term with a right to opt for a further five years than for a 10-year term with a tenant break option after five years.

As with any deal, you should ensure that you are getting at least two buildings and landlords competing for your occupation. Send out requests for proposals for the first stage, then negotiate with the parties to get the best terms.

And, finally, look carefully at the efficiency of the building in terms of both its layout and the cost in use, and the lifecycles of its component parts. That way, you should avoid any surprise bills once you have moved in.

 

7 RELOCATION TIPS

David Alexander from the UK Trade and Investment's Advisory Network has all the moves:

1. Make sure you really need it and that it will add to the business. Investment in new offices can be seen as a distraction from servicing clients. Equally, investors now weigh such outlays in terms of value for money and return on investment.

2. Make sure it's in the right location for the business in providing ease of access to suppliers, transport and customers. Ensure that it's not just short-term needs that will be serviced by your firm's move to a new location.

3. Plan for expansion, whether this means taking an option on a larger space or facility or simply taking on a bigger commitment and sub-letting it until you need it. It will save you money in the long run.

4. Don't build infrastructure that you can outsource. Outsource as much as possible to stay flexible. If you must run your own equipment, think about portable data centres - you won't face paying a landlord for restoration of facilities.

5. Make no immediate long-term contractual commitments, but do commit to making a commitment once a settling-in period is agreed. And it's a buyer's market at present, so shop around.

6. Ask for scaleable charges that go down as well as up. Many landlords offer scale-up but don't offer scale-down, unless you specifically request it.

7. Agree only service levels that are easy to measure and manage and review them regularly. Show your landlord or service-provider what you expect of them. Be polite but firm.

Find this article useful?

Get more great articles like this in your inbox every lunchtime