Could you have a more misaligned set of objectives?
The three players (sometimes four, but I’ll get back to that):
1. The tenant
2. The landlord
3. The broker
All of the role players have a similar basic set of outcomes, but clearly there is a disconnect because each makes it very difficult to transact, and each has a hidden agenda that is very difficult to uncover.The components to a leasing transaction are not often identifiable and in this note we plan to identify these building blocks, uncover some of the untruths and hopefully can give the reader an opportunity to have an open dialogue to do two things:
1. Attract new clients
2. Retain existing clients (even if it is not in the same building)
We would also like to define the term “broker” as brokers do not always fulfil the same, role and certainly do not operate in this tough environment with the same “tools”.
So, for their benefit, we exclude the CRES (Corporate Real Estate Services) and tenant representative folk, who have spent many tiring years demonstrating their true worth to both the landlord and tenant markets and are not often differentiated as true professionals in the space we call brokerage, but we call them the property professionals.
There happened to be a short article posted by John Jack, CEO Galetti Corporate Real Estate.
The Tenant
To be honest tenants don’t get the correct level of data/information from the players, from commercial terms and legal contracts to very little science behind their requirements. But to be fair to the other two players, tenants dip into the property market too often without having a clear vision, no mandate from the board and very little information.
First things first, have a beauty parade of brokers, appoint a firm and choose wisely
The tenant is ignorant about the South African real estate industry, educate them. Running around with multiple brokers is not a good idea, ever. It creates a false demand curve, with multiple introductions on the same lead.
Commercial terms (deal terms)
The most outstanding issue when it comes to deal terms is that there is very little open information and data around what the current market rates are for available space in any given node and is a thumb suck at best if a broker offers you this as a guide to the asking rental. Why is this? Why is it a guessing game?
And before we offer a solution, the input of data should be cleansed, and when we say cleansed we mean rental before rent free periods and tenant installation amortisation so that you get to a rack rate. All buildings are different I hear you ask? Yes they are but the fundamentals should be there and you should not be building a church for Christmas.
There are many ways to gather this information and share with all stakeholders, here are a few:
• Deals concluded (read cleansing above)
• Renewals
• Written offers made by tenants (determines a potential downturn in the rack rate) (it’s called demand, read up about demand and supply curves, everyone else uses the tool when selling product)
Has anyone ever been able to explain an escalation rate to a tenant? What about an international occupier / tenant? Let’s talk about what it is NOT… Using CPI in your explanation means you have failed your job hopelessly because it has nothing to do with CPI and everything to do with interest rates. The reason why this instrument is used is
because South Africa is one of a few countries that property yields start below borrowing costs and when we had high interest rate environment it was used as an instrument to catch up the negative position on day one, THE END.
It would also be useful to explain to your tenant that the escalation will take the rental above market at some point, however when you flatline such liability (IFRS 16), assume a mature market view of starting rental (yields above debt costs) without escalations, the two cash flows (including TVM) should be the same. If not, something is wrong.
Legal contracts
There are two types of clauses and only two:
1. Negotiable terms
2. Non-negotiable terms
Tenants need to be informed on the difference and why certain terms are not negotiable.
A small example:
Damage and destruction clause, what is that so one sided in the landlords favour? I have news for you: It’s not the landlord, it’s at the insurance companies insistence (be clever, add words like wilful act). It shows some slack but remains an insurable risk.
Become scientific in your requirements
If you are moving suburbs, do a centre of gravity study. Your staff are your most important asset, apparently, treat them that way, show them everyone has been considered.
• Do a full spacial analysis and consider all types of working (your trusted advisor should lead this, and should also be a beauty parade question).
• Form committees to include the staff (coffee, look and feel, Wi-Fi requirements and office rules).
This process lets the player know you are a serious party looking or space and you will get the service you deserve.
The final point is that your broker should run a closed tender for your business so that you create a platform of competition and allow the landlords to put their best foot forward and make sure you highlight your drivers for decision making such as (but these are your drivers so make them about your business):
All of the above will make you a fantastic tenant to work with, the market will take you seriously and through the process you will achieve all the company goals when considering a move.
The Landlord
Are they their own worst enemy?
The landlords vacancy schedule is open to all broking houses (or anyone who requests it as we found out) and is generally an excel spread sheet highlighting the pockets available. It is not a live portal (which it should be) which demands interaction between brokers and landlord representatives, and the broker liaison (internal or external in the case of property managers, that 4th party we illuded to at the outset).
Now let’s be honest, the asset manager (internal or external) creates and presents an annual budget to the fund and includes the following:
• In year renewals
• Vacancies and the strategy around filling it
• Budgets (expected rentals, capex, maintenance and potential uptake)
And this is how they get appraised and forms part of their KPI’s. Sure, there might be quarterly and half year reviews but as with any listed REIT, forecasting is key.
Please look through a few topics on REITS (valuation of portfolio and dividend distribution tells a story if you have not ever understood why your deal was not accepted).
The issue that we have with this approach is that deal flow happens at the BL level and rarely makes it to executive level should the deal terms not match the forecasting. God forbid you go above the BL paygrade. And there is very rarely full engagement from B2B.
Large landlords split their portfolio by:
• Asset type (industrial, commercial, retail, residential)
• Regional asset managers
• Portfolio managers (by asset class, or total)
• Executive
The elephant in the room... Where, in these large REITs, is there a key account director?
Let me give you a job description and then tell me if they exist. Tenants (we will call them ACME) are waiting with bated breath for this answer:
• A seasoned ACME representative who looks after ACME within the landlords portfolio, because they have many locations, or is significant occupier of space across the country.
• Has nothing to do with new incoming tenants, however is representing ACME on all issues pertaining to its existing occupations and any new requirements they might have.
• Is the SPOC (regardless of asset class, region, size of unit).
• Has no other function within the business, nothing to do with a portfolio of properties, or an asset class, nothing.
• Plays a mean round of golf, can cycle 30ks on an MTB, knows all the great restaurants, often is seen at a yoga class knows everything there is to know about ACME (anything to get close to ACME)
Next, we need to mention the landlord–broker relationship.
If truth be told the landlord does everything in its power to get itself in front of the tenant, try to propose direct engagement as quickly as possible because they believe that the brokers are actually incompetent or don’t have the landlord's best interest at heart.
The landlord is after a long term tenant who grows within the property and hopefully within the national portfolio, which leads to this mandate letter sent by ALL landlords to ALL brokers:
Additional commission will not be payable where the client in any way extends the lease period, increases the lease area, or where the client purchases the property after the conclusion of the original transaction.
I understand this stance but then there needs to be an entire relook into the broker commission structure, because it does not allow brokers to facilitate short term leases which would ultimately benefit the landlord without the broker pushing for terms to up his commission and losing the tenant over the landlord space.
And then the biggest condition:
******* will not pay commission to any broker whose prospect is already a tenant of ******.
So what ****** is saying is that they would rather lose the tenant, than pay a commission, does that sound like the landlord tenant representative, asset manager or exec team is doing their job?.
The big international brokerage firms are looking for alternative forms of income and one of these forms could be annuity income on short term leases at a determined rate (like an insurance broker).
Executives of all the large property companies are competent, respected property professionals, it’s just a damn shame they are not involved at a deal level.
And your vacant spaces are in a shocking condition, WHITEBOX them.
The Broker
We reiterate that this commentary excludes the CRES and tenant representation businesses who perform at a different level to the standard brokers who this is directed at.
Let’s start by stating for everyone’s benefit that they EAT WHAT THEY KILL and so that should tell a story from the outset, even a second hand car salesman gets an allowance to cover cost.
It can be argued that the brokerage businesses gives them the tools to perform at their peak but they really are not. They are given a demarcated area in which to operate and are expected to collate the information required to best understand where the opportunities are. Sounds simple right? Well not really.
Never once is the broker told that in order to progress up the property success ladder that they will be required to know everything about property, and we mean everything. Two basic examples:
• Is the broker given a stand plan of their area and report back on the various zoning rights therein, what the planning department looks like and the process of issuing rights over said stands? I will guess this is a hard NO.
• In training sessions which the brokerage business offers (what an assumption) is the rookie guided around the importance of speaking CFO language such as lease capitalisation (IFRS 16), DCFs, depreciation of assets, I could go on but this is an entire session.
So what’s the point I am trying to make?
This is the sales force that brings together the landlord and the tenant, mostly, and they are NOT EQUIPPED to service said geographical area, instead they scurry around cold calling all tenant and then scurry around writing introduction letters to landlords to protect their position.
And their line of questioning is completely focussed on the prize (commission).
Real estate has never ever been a hard sell. It’s a process of building up a client list that matures over time, but brokers can’t afford to build a pipeline, they need in-year deals and without that they cannot earn a living because there is ZERO fixed income for them from the firm they represent.
Then there is the ‘who is your client’ argument.
A broker never treats the landlord like his client until there is a commission to be paid. They never offer the landlord potential strategies on large vacancies or guide them with market information for positioning purposes. Nor does the broker create marketing opportunities that would create interest in the landlords assets. It’s a signage board and / or LinkedIn post or nothing.
Is the Tenant its client? Well no because there is zero science behind determining the tenants real needs, no real value add because they have driven the correct rental rate over the assets in its area.
Its an Uber driver with a vacancy schedule, and yes they are nice people and its not meant to demean the jobs they do but where is the accountability for their growth and future in the industry? How do you create a real purpose for them beyond shed filling?
The really good, well managed firms always end up focussing on the CRES and tenant representation work because they do a few things the brokerage firms don’t do:
• Pay their people a wage, like a professional , to source good clients with massive upside in revenue, but over a period
• Encourage continual learning
• Calm the process down
• Offer tools to guide the tenant through its real estate journey
As a last point, there will always be a requirement for a lazy landlord, a dipping tenant and a shed filling broker but they should be few and far between, not the norm.
White Boxing SA
082 938 4795
admin@whiteboxingsa.co.za
www.whiteboxingsa.co.za