l a i c r e m m Co
ISSUE 1 summer 2015
matters How to build a portfolio Maximising the asset of land The social media marketing effect
Review: Permitted development rights in Scotland
The art of valuation Assessing the challenge of the R22 gas ban
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WELCOME
CONTENTS
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4 Weighing up
At the time of writing the political map of the United Kingdom has been redrawn and once again Scotland seems to be at the centre of attention. It will continue to make a significant and dynamic contribution to the wider UK and European economy with commercial property an essential factor in this continued success.
Before or after? When to submit change of use application.
In the following pages, we discuss a wide range of matters which are intended to be thought-provoking and useful: from the growing importance of social media in marketing property to dealing with specific (and potentially costly) changes to air conditioning gas. The fundamentals of landlord and tenant relationships remain critical in the efficient use of property assets. Investment activity is high with some very attractive returns available for the right asset. Combined with asset management, agency and professional expertise, those returns can be enhanced further over time.
values at Torbreck Farm.
elcome to the very first edition of Commercial Matters, a new publication from CKD Galbraith, which aims to highlight the key issues of the commercial property sector and the work we’re involved in.
As we emerge from a deep recession into a growing and more confident market tempered with constrained funding availability, making the right decisions is critical to maintain value, occupancy levels and provide appropriate return to the investor/ occupier. The right advice at the right time is central to this. We would be delighted to hear your feedback and suggestions for future topics, plus any burning questions or requirements, so please get in touch by telephone, email or social media.
CKD Galbraith is Scotland’s leading
independent property consultancy. Drawing on a century of experience in land and property management, the firm is progressive and dynamic, employing more than 250 people in offices throughout Scotland. The firm provides a full range of property consulting services across the commercial, residential, rural and energy sectors.
the case for office conversion legislation in Scotland.
5 Increasing land 6 Cover story:
The art of valuation.
8 Sidestepping
the issues of FRI from the tenant’s perspective.
The
9 Air con and the
options to replace banned R22 gas.
10 Private portfolio – investing your money wisely. Deal round-up.
11 Let’s get social: the impact of Twitter et al.
CKD Galbraith provides a personal service, listening to clients and delivering advice to suit their particular opportunities and circumstances. Our associate, CKD Kennedy Macpherson, is based in London. Follow us on Twitter: @CKDGCommercial Like us on Facebook: www.facebook.com/ckdgalbraith Join us on Linkedin: www.linkedin.com/company/ckd-galbraith
Pamela Gray reports on the trend towards shorter term leases and its effect on tenants and landlords.
Commercial Matters is produced by J K Consultancy, Glasgow, and designed by George Gray Media & Design, St Andeux, France. © CKD Galbraith LLP.
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elieve it or not, the average lease length on commercial property outside central London stands at just over four years. It is a rarity to see a 20- or 25-year commercial lease on office, industrial and retail property. Today, most tenants demand maximum flexibility and know the potential financial liabilities that come with committing to a long-term lease without breaks. This is despite the fact that some tenant fit-outs are amortised over 10, 15 or even 20 years, particularly in the leisure sector. While the overall lease length may still be 10 or 15 years, many tenants will seek to negotiate break clauses to give them protective leverage. One notable exception is new build projects where longer terms of 10 years
Page 2 | Commercial Matters Summer 2015 | www.ckdgalbraith.co.uk | Twitter: @CKDGCommercial
impact of the shorter term lease plus are necessary for projects to be viable for lenders, developers and investors. This general shortening of leases has added a new layer of risk for landlords: shorter leases increase the prospect of rental voids, with the associated liabilities for void rates (except on listed buildings), void insurance and also service charge (in multi-let properties). There are also the potential costs of property obsolescence, particularly with a growing trend towards tenants’ limitation of repairing liabilities. All these factors impact on property values. This situation does not necessarily favour the tenant. It very much depends on the state of the market and this is particularly pertinent in Scotland, where there is no security of tenure for tenants. As the market improves, the pendulum swings back in favour of the landlord. It is
all very well having a break option, but in a buoyant market it is a high-risk strategy and landlords know it.
secure ‘improved terms to stay’ rather than the more traditional rent review negotiation process.
I have seen bullish tactics from owners confident they can achieve higher rents in the open market. With no security of tenure, tenants may be forced into a costly competitive situation. Tenants underestimate the significant costs of relocation at their peril – not forgetting the terminal dilapidations liability on exiting the previous lease.
The market continues to deliver variety and we will still see longer leases agreed in certain cases, mainly by retail and office occupiers certain of their future and who know they will get a good deal in return for their longer-term commitment.
As the market tightens, landlords may also seek to reflect the risks of a shorter lease into the overall rental package, resulting in higher occupational costs for tenants in the short to medium term. In leases with a break and a rent review in year five, it often comes down to brinksmanship between the parties. Some tenants (not intending to break) will try to use the break option as collateral to
However, the general move towards shorter leases poses a challenge to avoid voids and maintain security of income. Landlords who continue investing in their buildings and who look after their tenants will be those most likely to thrive in this new era. Pamela Gray is in charge of our commercial property asset management team. pamela.gray@ckdgalbraith.co.uk 0131 240 6963
www.ckdgalbraith.co.uk | Twitter: @CKDGCommercial | Commercial Matters Summer 2015 | Page 3
Permitted development rights
What next for Scotland? Robert Patrick reviews the impact of recent legislation in England and the potential effect of replicating it in Scotland.
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ince May 2013, a temporary change to permitted development rights legislation in England and Wales has allowed the conversion of offices to residential use without requiring a full planning application. The legislative change is in place until May 2016 and was intended to ease the process of converting offices to help increase housing stock and boost the
Deciding when to submit a change of use application Liz Cunningham highlights the benefits of applying for a change of use before selling a property.
economy. To secure a change of use, landlords need only seek prior approval, which can only be withheld due to concerns over traffic, contamination or flood risk. The change has proved unpopular with many local planning authorities, fearing a loss of control over town centres. Some areas were exempted from the legislation by the government, including parts of Islington and Westminster, along with an area of Manchester city centre. Local authorities who were not exempted have sought to use local planning orders – known as Article 4 directions – to remove permitted development rights for residential conversions. Oxford City Council, for example, is currently consulting on introducing an Article 4 direction to remove residential conversion rights for ‘key protected employment sites’, citing fears of ‘significant harm to local amenity and the
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he conversion of office space to residential properties has become commonplace not only in Edinburgh’s West End and New Town but in a variety of commercial properties across Scotland. CKD Galbraith has been involved in the sale of a number of commercial properties which are suitable for conversion to residential use. In each case we must weigh up whether it is best for the client to submit a change of use planning application prior to marketing the property or leave it up to a purchaser to deal with. Permitted development rights do not exist in Scotland for change of use from commercial to residential use, so a detailed planning application must be submitted. There are costs and timescales involved in this process – which may not be in line with a client’s objectives – but our experience shows the advantages of submitting an application prior to marketing a property are attractive. The benefits include:
proper planning of the area’. In some cases this led local government on a collision course with Westminster who saw the use of these directions as an attempt to undermine national legislation. As planning legislation is a devolved matter, in Scotland we still need to submit a full change of use application where residential use is sought for an existing office. So, would there be any advantage in allowing these conversions to take place as permitted development in Scotland? For landlords, such a change would make the process easier and likewise for purchasers buying offices for conversion. However, as seen in England, l Dunolly the legislation would Outdoor Centre, sold likely cause friction in February between local and 2015. Planning national governments. policies were
supportive of a change of use.
decision from the local planning authority. • The market is widened to those who can obtain residential mortgage funding. • Consequently, there may be more competition and demand for the property. Conversely, where an application has not been submitted prior to marketing, we have encountered the following issues. • As offers are received subject to planning, the timescale of concluding the deal is outwith the client’s control due to delays in receiving a decision from the planning authority.
• Offers are more likely to be made without any conditions in relation to planning. Accordingly, “clean offers” with no suspensive conditions may be submitted, which would be attractive to the seller.
• Parties have been put off making an offer or deals have fallen through due to the funding position. Owner-occupier developers who are only able to obtain funding through a residential mortgage can be put off making an offer due to the uncertainty of obtaining change of use planning consent.
• Deals can be concluded in a timely manner as they are not reliant on a pending
Of course, there are cases where successful sales have been concluded without a
Page 4 | Commercial Matters Summer 2015 | www.ckdgalbraith.co.uk | Twitter: @CKDGCommercial
A more significant concern would be the effect such a change could have on the availability of office space in town centres. The smaller offices, generally better suited to residential conversions, are the size most in demand by small businesses and startups. Ceding control of these offices could result in a shortage of office space, preventing small businesses from occupying town centre premises. This in turn would harm both the vitality of town centres and wider economic growth prospects. The current process therefore remains a sensible compromise, allowing planning authorities to assess the merits of individual change of use applications, weighing up the benefits of additional housing stock versus the loss of office space. Conversions are not usually opposed, but a free-for-all resulting in office shortages is possibly avoided.
Robert Patrick is a chartered planner at CKD Galbraith’s Perth office. robert.patrick@ckdgalbraith.co.uk 01738 456 078
Land: the asset of opportunity When it comes to maximising land values, Calum Innes finds that patience is a virtue.
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and is an asset that gives rise to opportunity, albeit one that depends on location, changing demand and permission being granted for an alternative use. In recent years we have seen interest in remote, exposed hilltops from windfarmers rather than those looking to graze sheep. While land on the outskirts of conurbations has always had the potential to find demand from developers looking to meet our ever-growing need for housing, experience shows that a measured, diligent and patient approach is needed to achieve success. Several decades ago one of our clients bought a small farm, Torbreck Farm, on the outskirts of Inverness for wintering sheep, which spent the majority of their year wandering the windy hilltops (which are now generating electricity!) Although the land served this purpose well, the world moved on and it was considered that the site might provide scope for housing.
change of use as the buyer has been a cash purchaser or they wish to continue using the property for a commercial purpose. Ultimately, it is essential to consider how the highest price for a property can be achieved by considering all the potential uses and planning policies and from our experience, the benefits of submitting a change of use application prior to sale speak for themselves.
Elizabeth Cunningham assists with agency, valuation and planning and is based in Perth. elizabeth.cunningham@ckdgalbraith.co.uk 01738 448 142
Promotion of land is often achieved by granting an option to a developer and relying on them to pursue the opportunity. In this case, the client wanted to retain control of the project, instructing CKD Galbraith to manage the process to maintain flexibility and fully explore the market to achieve maximum value. Assisted by a team of consultants with whom we’ve worked on a number of projects, we diligently presented the land to the planning authority as an opportunity for a significant residential expansion of the city of Inverness and with sound and robust support were ultimately successful in the site being allocated in the adopted development plan. We then spent a number of years resolving a variety of issues to ensure the land was capable of development in preparation for marketing:
• Development Agreement with adjoining landowners to allow our client to recoup value from infrastructure that may be of benefit to others • Delivering off-site road improvements required by the Local Authority • Ensuring availability of utility services and all necessary agreements to facilitate • Designing a surface water drainage solution • Resolving ecological issues relating to trees and protected species • Negotiation of all matters in relation to planning gain/Section75 obligations. The journey to establish Torbreck Farm as a residential development site was time consuming and at times hugely frustrating with the intervention of a recession adding further disincentive and uncertainty. However, with prudent manage-
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With astute management the client has achieved a significant increase in land value.
ment the land was finally granted detailed planning permission for an initial phase of development of around 200 units as part of a wider approved masterplan for more than 800 houses and a new primary school. In early 2015, following marketing and subsequent negotiations with the preferred bidder, a deal was concluded with house builder Barratt who are now on site delivering the initial phase of development. With astute management the client has achieved a significant increase in land value, demonstrating that land is an asset that may provide an opportunity for profit, though it is likely to take some time. Calum Innes is based in Perth and provides commercial and planning consultancy services. calum.innes@ckdgalbraith.co.uk 01738 456 075
www.ckdgalbraith.co.uk | Twitter: @CKDGCommercial | Commercial Matters Summer 2015 | Page 5
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aluation underpins nearly every financial decision we make in commercial property. Whether we are looking to invest or sell a property, manage an asset, secure a loan against property ownership, calculate our taxes or include a property in the balance sheet, a valuation will be required. Valuation is the practical exercise of arriving at the value of an asset at any single point in time. There are various methods of valuation, depending on the type of asset and the purpose of the valuation, but one of the most commonly used for commercial property is the investment method, based on evidence and analysis of comparable transactions. In theory, anyone with market knowledge can provide a valuation because it is simply an opinion. In practice, however, property and market analysis requires considerable skill, experience and judgement, with subjective assessments commonly being made on the prospects of rental growth, the future marketability of the property and the security of the income currently received and its prospects in the future. Valuers also require a fundamental knowledge of the lease and the implications that any one of the lease terms can have on a valuation of a property, including repair, alienation and rent review. In addition, valuations will always rely on a considerable number of assumptions, any one of which could have a direct impact on a valuation. It is important that these assumptions are identified
Valuation, valuation, valuation Richard Higgins and Harry Stott report on how valuations form the backbone of commercial property work and why selecting a professional to break down the issues is key. and agreed at the outset otherwise the resultant valuation is of no use. Over the past seven years, the uncertainty in the wider economic climate and the resulting volatility in the property market have clearly shown that quality, independent, transparent valuation advice is critical.
valuers abide by the RICS valuation standards and that they are experts in their fields, delivering credible and high quality reports, which are open and transparent. In essence, it is a quality assurance scheme, underpinning the quality of valuations and reporting provided by its members.
In order to establish the credibility, skills and professionalism of its members, the RICS has introduced an independent regulatory scheme, which continually monitors its members who conduct valuations. The Valuer Registration Scheme ensures that such registered
As owners, occupiers, developers of and lenders against property, you rely on and make important decisions based on a valuer’s judgment and expertise, quality standards and ethics. So the next time you need a valuation, make sure you instruct a valuer that you can trust will provide
l Pollphail Village, an abandoned purpose-built oil-workers’ village on the Cowal Penisula, Argyll, presented a unique valuation challenge.
Page 6 | Commercial Matters Summer 2015 | www.ckdgalbraith.co.uk | Twitter: @CKDGCommercial
you with quality advice on which you can truly rely. CKD Galbraith has 47 registered valuers with in-depth market knowledge covering the whole of Scotland. Over the last year, we have carried out around 400 valuations and valued a total of approximately £500,000,000 of property assets. As well as the “run of the mill” valuations of commercial properties for secured lending purposes and the valuation of land and residential properties for probate purposes, we also carry out agricultural valuations each year for the Agricultural Mortgage Company (AMC). Our breadth of knowledge and experience also means we are willing to consider more unusual valuations where other companies may decline instructions. That’s why we have been involved in valuations for whisky distilleries, mineral water supplies, a wildlife park, a former prison of war camp and even an abandoned village. We often find that if you stand back and fully consider the issues, understand the facts and circumstances, there is a means to provide a valuation with sound reasoning and justification. One such unique valuation was of Pollphail Village, Portavadie on the West Coast of Scotland where we were instructed on behalf of an administrator to carry out a valuation of an abandoned purpose-built oil-workers’ village on the Cowal Penisula, Argyll. The village had originally been built in the 1970s to provide accommodation for oil rig construction workers for a nearby dry dock, but due to changes in construction methods in the industry, the village was never occupied. Over the years the site
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if you stand back and fully consider the issues, understand the facts and circumstances, there is a means to provide a valuation with sound reasoning and justification.
fell into disrepair and was asset stripped. By the time we inspected the site all the buildings were derelict. It was important to understand the issues with this particular valuation: the site had a lapsed planning consent, significant demolition and site clearance costs and other potential environmental issues such as contamination issues and the presence of bats. As part of the process we requested quotes for demolition and site clearance to assist in our appraisal and liaised with the local planning authority. We provided our valuation to our client and were subsequently instructed to sell the property, which attracted UK and international media interest. Another seemingly quirky property we valued was Cultybraggan, a former Second World War POW camp near Comrie, Perthshire. We were instructed to value all the elements of the camp, which extended to 50 acres with a range of properties on site, including Nissen
huts, industrial buildings, allotments, a former nuclear bunker and agricultural land. Other issues associated with the valuation included cultural and heritage designations as there were a number of listed buildings on site due to the historical background to the property. There were also some let properties and all the leases had to be assessed, together with some planning consents. While the property as a whole was unusual, once we broke down its component parts, and with the necessary due diligence, it became relatively straightforward to accumulate a value for the subjects by gathering comparable evidence. We were also able to call on CKD Galbraith’s agricultural sales department to provide comparable evidence for the property’s agricultural element. These diverse instructions at first glance can appear daunting and difficult, but with our expertise we knew that once we gained an understanding of what is involved there is often a clear and pragmatic solution.
Richard Higgins is in charge of our commercial investment and agency division. Harry Stott is a commercial and development specialist at CKD Galbraith’s Perth and Edinburgh offices. richard.higgins@ckdgalbraith.co.uk 0131 240 6966 harry.stott@ckdgalbraith.co.uk 01738 465 065
www.ckdgalbraith.co.uk | Twitter: @CKDGCommercial | Commercial Matters Summer 2015 | Page 7
FRI: how to avoid the elephant traps Pam Over sets out the issues raised by full repairing and insuring leases from the tenant’s perspective.
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ost modern leases of commercial premises are drawn on a FRI (full repairing and insuring) basis. This means the tenant relieves the landlord of all liability for repairing and insuring the property. There are generally two options: a standalone lease where the entire building is let to a tenant, or an airspace lease where there are multiple occupants. In the latter case the landlord will retain the
repairing obligation and recover costs from all the tenants, usually through a service charge. Before taking a lease, tenants normally instruct professional advisors to survey the current repair of the property and note any “patent defects”. If the defect is obvious to a professional surveyor there will be no remedy from the landlord if the tenant then finds themselves liable for the cost of a repair. But what protection is there if the fault is a “latent defect” – a
hidden fault that only becomes apparent with time? Examples could be glazing which has suffered nickel sulphide inclusion, defective tanking allowing basements to let in water, inadequate wind posts or wall tiles, causing movement and damage to walls or inadequate foundations, causing subsidence to the building. If a tenant has signed a lease with the wording: “The tenant accepts the premises at the commencement of the lease in proper tenantable condition,” then the tenant is responsible for the cost of any future repairs. In a new-build property one potential
Page 8 | Commercial Matters Summer 2015 | www.ckdgalbraith.co.uk | Twitter: @CKDGCommercial
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A belt-and-braces approach is to specifically exclude any responsibility for latent and inherent defects. This is the advised approach for new-build properties.
solution is for the tenant to have a collateral warranty from the original contractor and/or design team. A collateral warranty gives the tenant a right of action against the warranty provider in respect of any breach of the building contract terms in relation to the contractor or in terms of the appointment documentation in relation to the consultants. Unfortunately, this may not be sufficient if the defect is discovered outwith the limitation period or if the contractor has become insolvent. A belt-and-braces approach is to specifically exclude any responsibility for latent and inherent defects. This is the advised approach for new-build properties as it makes sure the risk of uncertain issues remains with the landlord. It also ensures that in multi–let properties the landlord cannot seek to remedy the defect and recover the cost through the service charge. To avoid the elephant trap, remember: • When entering into a lease a tenant should be careful to instruct the necessary surveys. • If a fault or defect is obvious but not noted in the surveys the tenant will not have recovery against the landlord. • If the fault is latent the tenant must have excluded liability for latent and inherent defects from the repairing clauses otherwise they may be liable for the potentially substantial costs to remedy the situation. • A collateral warranty gives the tenant a degree of protection but will have a limited lifespan and depends on the provider remaining solvent. Pam Over is based in Edinburgh and leads CKD Galbraith’s commercial team. pam.over@ckdgalbraith.co.uk 0131 240 6965
The cost of the A/C time bomb Martin Cassels explains the implications of the recent ban on R22 gas in air conditioning units – including who foots the bill for the upgrades.
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n January 2015, it became illegal to use hydrochlorofluorocarbons (HCFCs), including the ozonedepleting refrigerant gas R22. The outright ban of this refrigerant, commonly used in air conditioning systems pre-dating 2004, will have a major effect on air-conditioning costs. Since 2010 it has only been possible to use recycled R22 to recharge or maintain equipment and from January 2015, systems are not to be topped up with any R22 at all. There are two options to consider for the future. Either the systems are replaced with new A/C equipment or a modern refrigerant is used to replace the R22. The second option often involves replacing system parts or pipes and can lead to leaks, so the costs and practicalities may ultimately mean that installing a new A/C system is the only viable option.
this is a relevant part of a dilapidations claim at lease expiry. The explosion in use of VRF (Variable Refrigerant Flow) air conditioning systems – electric heating and cooling – raises some interesting issues for landlords and tenants. In the past, many properties used traditional gas fired boilers and radiators and little or no cooling. VRF has a limited life span, usually 15-20 years, but our Building Surveying team’s recent experience has shown that some inferior quality systems need major repair or complete replacement in as little as 10-12 years – well within normal institutional lease terms. The cost implications for landlords or
A third, unsustainable, option involves continuing to run the equipment, but as it cannot be repaired or maintained it will soon need to be replaced. The key question for landlords and tenants is: who pays for these options? In a multi-let building, the service charge provisions determine if the landlord can recover costs of dealing with the problem from tenants. It will be important to ascertain whether the provisions allow for the costs of repair, improvement and/ or replacement of any A/C system to be charged to the tenants. In addition, it is not always clear what actually constitutes repair, improvement or replacement. For example, is the A/C equipment in disrepair if it is still able to function, although not in the most energyefficient way? For current tenants occupying buildings on Full Repairing and Insuring (FRI) terms, it is now impossible to maintain any system containing R22 – the equipment has to be replaced. If the system is not working or R22 has not been replaced,
tenants can be immense so the simple message is that pre-planning is essential, either before lease expiry as a landlord or in proper due diligence before entering a new lease as a tenant. Of course there are energy efficiency issues to consider and the demands of modern day occupancy, but it begs the question whether the old gas boiler rumbling in the basement for 50 years is perhaps not such a bad thing after all! Martin Cassels is in charge of CKD Galbraith’s building surveying team. martin.cassels@ckdgalbraith.co.uk 0131 240 6992
www.ckdgalbraith.co.uk | Twitter: @CKDGCommercial | Commercial Matters Summer 2015 | Page 9
DEAL round-up Sotheby’s relocates to Thistle Street, Edinburgh
to the 971 sq ft first floor office during January 2015 on a five-year lease at a rent of £17 sq ft.
The company moved into part of the ground floor of a threestorey refurbished townhouse at 21-23 Thistle House, Thistle Street, Edinburgh EH2 1DF, at the end of March.
CKD Galbraith worked with international auctioneers Sotheby’s to secure a relocation within Edinburgh to improve the quality and efficiency of their Scottish office space. We worked with them to surrender their lease at Howe Street, which had just under a year to run.
CKD Galbraith was instructed in May 2014 to take over the marketing of the three-storey townhouse.
The office space includes meeting room, kitchen area and – importantly – ground floor brand prominence on Thistle Street.
OSCARS moves into Cairncross House
Marketing agent Katie Gibson sourced a range of alternative options to better suit their future requirements, which included a central location.
The top floor suite (1,695 sq ft) of Cairncross House, 25 Union Street, Edinburgh EH1 3LR, was successfully let to new tenant OSCARS (Out of School Scotland) by CKD Galbraith on behalf of landlord C & W Assets Ltd.
She worked closely with the Sotheby’s team to view six possibilities and draw up a shortlist of three to negotiate best terms as well as working with them to secure the right deal, ensuring considerable savings in surrender and lease negotiation, including dilapidations.
A headline rent with minimum rent-free and full repairing and insuring basis was secured. Only one ground floor suite of 743 sq ft remains available.
Big brands secured at Castle Street, Edinburgh CKD Galbraith has secured a second high profile brand at 10 Castle Street, Edinburgh EH2 3AT, on behalf of a private landlord. Watts Plc, a national building surveying company, moved in
Previously let in its entirely to Ukio Bankas, which went into administration, the building was lying vacant until CKD Galbraith came on board. Since then, they have let the basement to Lululemon for their Athletica Showroom and the top floor to Temporis Capital. The ground floor is still available for let and offers excellent brand visibility on to Castle Street.
How to build a small portfolio David Clarke recommends a simple strategy for private investors.
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or the year ending December 2014, the IPD Annual Property Index, showed a near record breaking total return of 17.8% with an income return of 5.2% and capital growth of 12.0%. When compared to the other main asset classes, property has shown significant outperformance in recent years: Asset Class
Annualised Total Returns 1 yr
All Property
3 yr
5 yr 10 yr
17.8 10.5 10.9
Property Equities 24.3 23.7
6.2
12.3
2.4
Equities
0.5
9.5
7.7
6.8
Bonds
11.8
3.5
7.1
6.3
It is likely that future performance will be more driven by income returns with forecasts predicting modest capital growth in 2015/16 and annualised total returns in the region of 5-6% over the next five years. If building a small portfolio of up to £10m our view would be to start with about £4m of assets with longer term secure income as the core. Then adding higher yielding assets with some value-add opportuni-
ties. With the bulk of returns due to derive from income over the next few years we feel this is where investors should focus while not overlooking capital returns. High Street retail offers well let, longer income. A shop in central Edinburgh or Glasgow may offer 10 years income to a national multiple with a strong covenant. The security offered is reflected in a lower income return of 5-6%. Smaller towns will offer higher returns, reflecting the less prime nature of the pitches. With core income secured, an investor could look to increase the overall portfolio income return. Multi-let industrial or trade-counter assets offer higher returns with shorter leases and a range of tenant covenants. Being multi-let derisks the shorter leases and allows for asset management to add value and create rental growth. With industrial offering yields from 6.5% to 10% plus, assets can be found to fit with most portfolio strategies. Offices can offer good returns, but the cyclical nature of their performance can create risk. The key is the timing of the purchase and an exit at the right time in the cycle in both the market and capital expenditure profile of the building. This would lead to a portfolio of about £10m split roughly 40/60 between retail
and industrial assets yielding around 6.5-7.5% for an investor before management costs are deducted. With value-add opportunities an annual ungeared total return of 10% plus in a normal year could be achievable. To improve returns, investors could look to add gearing to portfolios. This will
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assets can be found to fit with most portfolio strategies.
boost income returns, but we would be cautious about leveraging too highly at present. CKD Galbraith build individual portfolios with values in excess of £20m. As well as continuing to give strategic advice on these we have current requirements on behalf of other investors for various assets of up to £5m in lot size as seed assets for new portfolios. David Clarke provides commercial investment, agency and portfolio management services. david.clarke@ckdgalbraith.co.uk 01786 434 630
Page 10 | Commercial Matters Summer 2015 | www.ckdgalbraith.co.uk | Twitter: @CKDGCommercial
The social network
TWEETS
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Thistle St Lane SW
@ThistleStLaneSW
Best mews office available to rent in Edinburgh, fantastic central location 1,720 sqft over Twitter 4 open plan floors,move Search in condition!contact @ckdgcommercial to view
Katie Gibson looks at how Facebook and Co are changing the way commercial property is marketed.
The professional networking site LinkedIn offers a great way of bringing existing contacts online and establishing new ones. When it comes to marketing properties, we can pitch to a largely professional audi-
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Do you know it's a 6 minute walk to Waverley from my front door & 1 minute and 7 seconds to the closest bus stop! #officetolet #edinburgh
Thistle St Lane SW @ThistleStLaneSW · Aug 5
The heart of Edinburgh
I have been very busy recently, I have had two interested parties short-list me as a building they might move into!! fingers crossed
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@CKDGCommercial
Twitter works well as a “micro website” for a company, campaign or cause. I started an account for Thistle St Lane – a beautiful mews office block we are marketing in Edinburgh (www.twitter.com/ ThistleStLaneSW) which allowed us to interact with potential occupiers and share updates on everything from building renovations, viewings, local attractions and even sightings of David Beckham in the area!
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Thistle St Lane SW @ThistleStLaneSW · Jul 8
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The closest bus stop to my front door is 1 min 7 seconds away! #hometime #bus #Edinburgh #officetolet @on_lothianbuses
@CKDGCommercial
The first social media platform we usually think of is Facebook – and with 1.39 billion active users around the world at the last count, that’s hardly surprising. Regarded as a more ‘personal’ form of communication, it’s one where our residential colleagues have had great success, but in my opinion it’s not a place where people really want to do business.
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Thistle St Lane SW @ThistleStLaneSW · Jul 1
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ocial media is a term we hear every day and a tool that has transformed the way we communicate. The various platforms – Facebook, Instagram, Twitter, YouTube, Pinterest – have been the making of new companies and helped existing businesses expand. It’s inevitable that social media marketing has had an impact, but how has it affected commercial property?
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Thistle St Lane SW @ThistleStLaneSW · Jun 26
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Want to make exercise part of your daily routine? I am only a 3 minute walk to Password CKDG Commercial @CKDGCommercial · 2h Bannatynes gym! #Edinburgh @Bannatyne From #concept to #construction...with you #officetolet Sign up for Twitter #excercise people to “view”
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properties from their office. This is a time My rent is £13.00 sq ft compared to 50 Frederick St which is £23.00 sq ft. Its clear to see I'm good value! #edinburgh #officetolet saver for potential occupiers, but it brings new challenges for agents, who must find different ways to entice people to leave their desks and cross the threshold of comCKDG Commercial · mercial properties. Office take up in Edinburgh for quarter 1 - 2015 shows around 200,000 Trends · Change
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People are also doing more on the move. CKDG Commercial · Visits to the CKD Very pleased to have secured Sotheby's Auctioneers a new office in Sign up for Twitter Edinburgh City Centre. #actingforthetenant #deal #dlapiper Galbraith website are now split 50-50 Trends CKDG Commercial · between mobile What an amazing day in #Edinburgh! #lunch devices (including in the #sunshine in #princesstreet gardens! tablets) and desktop #notadayforworking ence who read the information on offer computers while traffic from social ’referbut who perhaps won’t interact until the rals’ continues to increase year on year. time is right for them. Email
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The classified listing website, Gumtree, which is not really social media, has had fantastic, free results for advertising and marketing small properties. On average we have received between five and 20 phone calls per unit. Interest tends to come from start-ups, which does bring its own challenges as they may not have the financial history landlords prefer in a tenant. But it’s these new tenants, “the iPhone generation”, who are transforming the way the world – and commercial property – works. Google Maps makes it easy for
Visits to the CKD Galbraith website are now split 50-50 between mobile devices (including tablets) and desktop computers while traffic from social ’ r eferrals’ continues to increase year on year.
Social media may not yet have fundamentally affected commercial property, but as the “millennials” who have grown up with social media become occupiers, landlords, surveyors and commercial agents we will see further changes. CKD Galbraith is keen to adapt quickly and that’s why we focus on the “big three” social networks: Facebook, Twitter and LinkedIn to raise our company profile. The @CKDGCommercial feed on Twitter allows us to share our knowledge and understanding of commercial surveying and add context for clients as well as highlighting upcoming opportunities before they appear elsewhere. Follow, like or connect with us: Katie Gibson is a wellestablished commercial agent in the Edinburgh market. katie.gibson@ckdgalbraith.co.uk 0131 240 6981
www.ckdgalbraith.co.uk | Twitter: @CKDGCommercial | Commercial Matters Summer 2015 | Page 11
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l Property management
We operate from offices across Scotland including Edinburgh, Aberdeen, Perth, Stirling, Inverness, Elgin, Cupar, Ayr, Castle Douglas, Kelso and Galashiels.
l Asset management l Commercial valuation l Professional services l Investment consultancy l Sales, lettings & acquisition l Project co-ordination
Property management Kash Bhatti 0131 240 6970 kash.bhatti@ckdgalbraith.co.uk Jill Gayford 0131 240 6987 jill.gayford@ckdgalbraith.co.uk
l Building surveying l Facilities management
Pamela Gray 0131 240 6963 pamela.gray@ckdgalbraith.co.uk
In addition to our specialist services, we manage in excess of ÂŁ450 million of commercial property across the UK. We deal with around 750 tenants in more than 120 properties from single units to large multi-let environments such as shopping centres.
0131 240 6965 Pam Over pam.over@ckdgalbraith.co.uk Asset management David Clarke 01786 434 630 david.clarke@ckdgalbraith.co.uk Pamela Gray 0131 240 6963 pamela.gray@ckdgalbraith.co.uk Richard Higgins 0131 240 6966 richard.higgins@ckdgalbraith.co.uk Pam Over 0131 240 6965 pam.over@ckdgalbraith.co.uk Agency (investment, office, retail & industrial) David Clarke 01786 434 630 david.clarke@ckdgalbraith.co.uk Katie Gibson 0131 240 6981 katie.gibson@ckdgalbraith.co.uk Richard Higgins 0131 240 6966 richard.higgins@ckdgalbraith.co.uk Harry Stott 01738 456 065 harry.stott@ckdgalbraith.co.uk
Planning Calum Innes 01738 456 075 calum.innes@ckdgalbraith.co.uk Andrew Jarvie 01786 434 638 andrew.jarvie@ckdgalbraith.co.uk Robert Patrick 01738 456 078 robert.patrick@ckdgalbraith.co.uk Harry Stott 01738 456 065 harry.stott@ckdgalbraith.co.uk Project development & co-ordination Calum Innes 01738 456 075 calum.innes@ckdgalbraith.co.uk 0131 240 6965 Pam Over pam.over@ckdgalbraith.co.uk Professional & valuation Pamela Gray 0131 240 6963 pamela.gray@ckdgalbraith.co.uk Richard Higgins 0131 240 6966 richard.higgins@ckdgalbraith.co.uk Calum Innes 01738 456 075 calum.innes@ckdgalbraith.co.uk Harry Stott 01738 456 065 harry.stott@ckdgalbraith.co.uk Building surveying Martin Cassels 0131 240 6992 martin.cassels@ckdgalbraith.co.uk Peter Scott Aiton 0131 240 6967 peter.scottaiton@ckdgalbraith.co.uk James Taylor 01786 434 610 james.taylor@ckdgalbraith.co.uk Craig Weir 0131 240 2285 craig.weir@ckdgalbraith.co.uk
Facilities management Kash Bhatti 0131 240 6970 kash.bhatti@ckdgalbraith.co.uk
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