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What is today's blog about?
Jonathan Roth MSc MRICS is an Investment Surveyor at Lewis & Partners, a niche investment consultancy specialising in the UK commercial real estate market. He has previous experience at Edward Charles & Partners specialising in central London offices.
In this week’s blog, Jonathan writes about the implications of vacant commercial units and how you can consider these within your RICS APC competencies.
Over to Jon...
'Firstly, a big thank you to Property Elite for the abundance of useful RICS APC resources they have provided throughout my APC journey. The countless newsletters, podcasts, and resources have been amazing and have undoubtedly helped me get through my APC and qualify as a Chartered Surveyor. I would also like to thank them for inviting me on to their platform and allowing me to share my thoughts.
I recently wrote an article about vacant commercial spaces which I have briefly summarised below. This is a follow up article focusing on the implications of vacancy on some of the RICS APC competencies'.
You can read more from Jon in his market newsletter.
So, What About Those Vacant Commercial Units?
Last week, I wrote an article about vacant commercial spaces. I discussed how as a result of the internet and more recently Covid, if landlords want to attract demand to their spaces, then they must offer a unique proposition. Whether that be on pricing, quality, or even the simple proposition of collaboration and networking opportunities.
Those not able to offer this, are likely to have their spaces remain vacant. Covid has thought us that most things can be achieved from home and so if a unique proposition cannot be offered then people will do it from home.
So, what to do about those vacant spaces? Landlords must be encouraged to let the space in its existing use, convert it to much needed residential use, or even consider more radical approaches such as urban farms.
Whatever the approach, I believe that vacant spaces must be minimised wherever possible.
From an APC Perspective…
In the article, I focus on vacancy from an APC perspective and its implications.
Vacancy is relevant to many Commercial Real Estate competencies:
Inspection
Leasing & Letting and how to avoid vacancy
Purchase & Sale and understanding the implications for a prospective purchaser
Valuation and understanding how vacancy impacts value
Sustainability in relation to the Minimum Energy Efficiency Standard (MEES) and EPCs
Planning-related competencies
Inspection
If a property is vacant, we must ask the question why? A great way of finding out is by inspecting the locality and the property itself. By doing so, a surveyor will find out if there is general vacancy in the area, or if it is specific to the building.
If it is location related, we can evaluate whether it is due to a lack of public transport, too much supply on the market, or simply because of a general downturn in the wider economy.
If building specific, reasons can include the space recently becoming vacating, major refurbishment works being expected, or the landlord’s intention to put the property up for sale.
Additionally, when inspecting the internal parts of vacant space, we can look for signs such as the building’s structure, specification & defects and whether any of these are a cause for the vacancy.
Leasing and Letting
If acting for a landlord, it is essential to inspect the unit and understand how to best position the space to let.
We need to consider the condition and age of the building and make sure it is up to date with modern day tenant requirements. This could be through a comprehensive refurbishment or a light touch, such as replacement of the lighting or painting of the walls.
We also need to advise on estimated rental value, as well as marketing strategies to be implemented. Additional considerations would be alternative uses for the space (see Planning below) or a requirement for a new EPC (see Sustainability below).
Further implications for the landlord are the payment of business rates and service charge in the absence of a tenant covering the costs. Additionally, we need to make sure that the insurers are aware of the void, as well as considering a claim for empty business rates.
Purchase & Sale
Similar to leasing & letting, inspecting a vacant unit and understanding its implications on a potential sale are key.
When advising on the sale of a vacant property, it is crucial to understand the client’s objectives. Is the client targeting purchasers to owner occupy the space, are they looking for someone to purchase the site and conduct refurbishment works, or is the landlord seeking to refurbish the space themselves and subsequently let it prior to a sale?
Additional recommendations would be to look at previous planning applications and understand if there is consent to change the use and then convert the physical space to accommodate an alternative use.
Whether the space is vacant or let will also have an impact on the potential sale price, as a potential purchaser would expect a discount for an un-occupied unit as it comes with the additional risk of no income certainty. This is discussed more in the Valuation competency below.
Valuation
When valuing a vacant property, it is likely to be valued as a riskier investment versus if it was let. This is as a result of having no certainty of income with the additional risk incorporated into the yield (or deferring the receivable income via an explicit void period and incentive package) – there are more ways than one to do this.
The valuer would determine how much more risk there is, how much demand there is for the space and the ease of letting the space.
If valuing using the comparable or investment methods, the valuer would need to make the appropriate adjustments when valuing as vacant, whether incorporated as a higher yield, deferred income stream or a lower total value per square foot.
Sustainability
As mentioned within Leasing and Letting, if a unit is left vacant, prior to letting the space we need to check the EPC rating and ensuring it meets the minimum MEES requirement of an E rating (with a proposed uplift to this minimum standard of C by 2027).
Further considerations could be to inspect the lighting, heating and glazing of the unit and whether these can be improved and make the building more sustainable and energy efficient. This would subsequently improve the EPC rating, the letability of the space and its potential future sale value.
Planning
Regarding planning, if a commercial unit is vacant, can it easily be converted to residential and does it has any permitted development rights?
This will include checking for:
Past planning applications and whether there have been any previous consents to build additional floors should be considered
Listed status which could limit potential refurbishment works
What updated uses are permitted within the space following the changes to the use classes in September 2020 (see our blog article!)
Conclusion
We have only discussed a few competencies in this blog; there are many other potential implications to consider for vacant commercial units. However, regardless of the competency, vacancy will have some sort of influence on most RICS APC competencies.
The RICS APC is very much about market experience and being able to give reasoned advice to clients at level 3. By having a clear understanding of the consequences of a vacant unit, you can demonstrate advanced knowledge and the ability to provide sound advice to clients.
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N.b. Nothing in this article constitutes legal, professional or financial advice.