‘2015: The Year of Opportunities for Opportunity Funds’ – Column by Steve Jude, CEO on Co-Star18/12/2014
2015: The year of opportunities for opportunity funds
Investor sentiment towards distressed assets became increasingly positive across the UK and in Europe in 2014, with opportunistic funds snapping up distressed assets far and wide. While these purchases have been popular investment decisions, has enough really been done to realise the true value of these assets?
A distressed asset isn’t necessarily a bad building that no occupier will approach. Often it is just a building that is not being managed effectively for its location and target audiences; not offering occupiers what they need. There is a huge potential to transform such distressed office stock that is not fit for purpose, so opportunistic funds must now rethink the traditional investment models that rely on conventional long-term lets, if they are to unlock their assets’ full potential.
2015 will be a year of opportunity for forward thinking asset managers who adopt a new approach to the management of distressed assets and look for new ways to generate their assets’ income and value.
Traditionally, some funds have purchased distressed office assets and allowed them to sit vacant, waiting to secure traditional long-term leases. This model has been acceptable in the past as long term tenancies often help increase the valuation estimate of a building. Valuation can be based upon expected rent; even if a long term occupier is unlikely to materialise. This scenario is increasingly the case in this changed world of business, where start-ups and SMEs are revolutionising the marketplace.
Yet the office sector has been slow to acknowledge this change, continuing to value assets based on long term lease valuation; leases that are restrictive and pushing smaller, yet growing, businesses away. In order to run efficiently, SMEs need to respond to their markets quickly, expanding or decreasing when necessary, and will therefore demand greater flexibility and freedom from their working space. In short, very short-term commitments.
A reliance on the traditional ‘investment method’ of valuation for commercial property means landlords are missing a great business opportunity to tailor their under-utilised, second hand office space and lease terms to the different requirements of start-ups and SMEs, subsequently allowing them to maintain a presence in the burgeoning business hubs of many of our towns and cities.
So how can traditional distressed fund and asset managers generate value from their assets going forward? What are the opportunities that they have for making good these secondary buildings, away from just relying on conventional long-term lets?
The answer is clear. It’s time to rethink traditional business and investment models that rely on securing long term leases. These commitments just don’t work for the new and increasingly powerful, workforce of SMEs. Alternatives are required in order to generate revenue and increase the asset’s current value.
There are many ways to do this, one of which is to create a small business incubator who can provide flexible short term office space to the new business powerhouses. This SME market provides a real opportunity for forward thinking institutional asset managers to squeeze value from a building prior to any long term plan for conversion. An experienced operator can manage the secondary office location and importantly, attract this key entrepreneurial occupier market through more flexible terms, while the building owner sits back and enjoys a newly generated cash income from regular rental payments.
This is the kind of disruptive business model that bridges the gap between the needs of entrepreneurs and landlords and is the kind of model that savvy opportunistic funds are likely to continue to adopt in 2015.
We need to take heed of our business community’s demands and offer under-utilised office space at more affordable prices and with shorter, more flexible terms. This will provide the foundation for the future of British business but will, importantly, generate an income from an asset that would otherwise not realise its true potential value.
2015 will be the year for opportunity.
Steve Jude is CEO of Citibase, whose disruptive business model generates short term cash for owners of second hand office buildings.