If your manufacturing business is an “accidental landlord”, beware: you could be missing out on value – or overlooking hidden risks

25 May 2016

If you were asked what type of companies act as commercial and industrial landlords for the majority of UK property, what would your reply be? The logical response would be major property companies. But you’d be wrong.

In fact, most industrial property in the UK is owned by companies whose main focus isn’t on managing real estate, but on some other commercial activity entirely. A huge slice of this stock belongs to industrial manufacturing firms of all sizes in all regions of the country who – for largely historical reasons, such as mergers or acquisitions – have ended up with major real estate holdings.

Often these property assets are playing a pivotal role in the strategies of the companies who own them, perhaps by providing production facilities or warehousing. But in many cases these property holdings are peripheral to what they do, meaning they devote little attention to them at either an operational or strategic level.

I’ve coined a term for these firms who own substantial land and property holdings but don’t consider them core to their business: “accidental landlords”. And my daily conversations with manufacturing businesses around the country confirm two things. One, there are lots of accidental landlords out there. And two, they’re collectively missing out on a vast amount of potential value.

Why? Well, because they don’t focus much management attention on their property assets, accidental landlords fail to identify and pursue opportunities to manage them more effectively or enhance their value. And this lost potential value has become all the greater since the financial crisis, with cost pressures having caused many firms to cut back or shut down their in-house property advice teams.

The result is that companies often don’t appreciate the true value of the real estate assets they hold. This can be a dream scenario for property developers seeking to buy potentially valuable property at knock-down prices for prime residential or retail developments. But for the manufacturers selling the assets, it’s a situation that’s clearly far from ideal.

A lack of insight into property values can also see some manufacturers lose out in other ways. For example, firms occupying leasehold properties may not argue as hard as they could against rent increases – and end up paying over the odds.

For manufacturers suffering any or all of these problems, the underlying issue is that a disconnect has opened between their operational strategy and property strategy. And it’s a gap that’s now set to become even more of an issue with the implementation of the IFRS 16 accounting standard, effective from January 2019. By requiring businesses to move occupational leases onto their balance sheets, this change will raise tough question around whether they should buy or lease their estate, with potential knock-on effects on key areas such as their ability to raise debt.  

So, what’s to be done? To shake off the status of “accidental landlord” and start to realise the full value of property, manufacturers need to integrate their business strategy with all aspects of their property strategy – acquisition, disposal, expansion, rent-or-buy decisions – and take a holistic view across all areas. This means carrying out a strategic review looking at every aspect of the portfolio, examining issues such as the potential for alternative use, strategic planning requirements, property cost benchmarking, capital allowance contributions, rateable values appeals, and more.

In our daily work, we at PwC are helping growing numbers of manufacturing clients carry out reviews of this type. And we invariably find that looking at all these aspects together generates a dashboard of opportunities to release capital and remove costs. Inevitably, each of these possibilities also carries its own opportunity costs – and in deciding whether to pursue them, it’s always vital to make sure that the capital could not be allocated to better effect elsewhere in the business.

Our teams at PwC are taking a similarly holistic view of clients’ operations and property assets to maximise value in deal situations. For example, when providing corporate finance advice recently on the sale of a Midlands-based industrial business, we ran a twin-track process – with our M&A team seeking out trade sale opportunities, and our property team negotiating in parallel with developers around alternative uses. The result: higher value for the client.

So, is your business an accidental landlord? And even if you don’t fall into that category, how confident are you that you’re realising the fullest possible value from your property holdings and/or leases? Maybe it’s time to take a closer look at your property portfolio – and ensure you’re not selling your business short by failing to focus on real estate.

Tom Wheldon | Senior manager, Real Estate Deals
Email | +44(0)113 289 4061

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