Market Insight — Real Estate Optimization during Times of Crisis

Market Insight — Real Estate Optimization during Times of Crisis

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6 Strategies to free up cash, reduce costs, and generate additional income from your industrial and commercial real estate.

For many businesses in China, this is a time of crisis. Here are six ways to use your commercial and industrial real estate in order to reduce cost and generate extra income:
• Reduce rental rate
• Reduce operational costs
• Reduce size
• Apply for rent holiday
• Sublet space
• Enter into a sale-and-leaseback

1) Reduce rental rate
Engage your landlord in a conversation regarding ‘early lease renewal’. Even if your lease is not yet up for renewal, planning longer ahead into the future could be in everyone’s best interest. You may propose to your landlord an early contract renewal for a number of additional years and be granted a reduced rental rate, which will commence effective immediately.

2) Reduce operational cost
Utility costs such as: HVAC, electrical, cleaning, security, etc., can make up for a significant proportion of your real estate spend. These costs can be saved quickly and easily by fencing off space that is currently not used, and turning-off unnecessary equipment.

3) Reduce size
If you foresee that you will need less space in the mid-term future than what you are currently renting, then approach your landlord to see whether it is possible to return a portion of your rented area. Maybe the landlord knows of other tenants in your business, park, or office tower that need extra space? Another possibility is to help facilitate an arrangement by introducing a company in your industry that may be a suitable tenant for your landlord. One can combine a space reduction with an early renewal as described under 1).

4) Apply for rental holiday
It is possible to apply for rent holiday or reduced rent for a few months. The Chinese Government has directed landlords that are state-owned-enterprises (SOEs) to offer such rent reductions to their tenants for office, industrial, and retail space. Other landlords may follow suit in order to create goodwill and in order to avoid insolvency of their tenants.

5) Sublet space
Sublet your currently vacant premises in order to create income from otherwise idle space. Surplus office space could be used as co-working space, event space, or for document storage. Empty space in your production or warehouse building could be let for storage of excess inventory from either businesses inside your own group, suppliers, customers, or neighboring businesses. Whether it’s for office or industrial space, review your current agreements and see whether there are possibilities for in-sourcing; maybe this is the time to undo some of your previous outsourcing and put things back under your own roof?

6) Sale-and-leaseback
For companies with a solid business and stable mid-term perspective, entering into a ‘sale-and-leaseback’ arrangement is an easy way to free up cash. By selling your property to an investor and renting it back, typically for a period of 7 to 12 years, you are making your business asset-light and more focused on your core business. For the right kind of investor, it is attractive to have a property that comes with a tenant that rents the entire space for a longer time period.

You will experience the most powerful effect when successfully combining several of the above strategies. For example: a rent reduction of 20% combined with a 25% lower footprint and one month of rent holiday per year will in total lead to your business saving almost half of its yearly real estate expense!

Be aware that no matter how big your landlord is and no matter whether it is a pension fund, REIT, developer, wealthy individual, SOE or other entity owning your premises, in all cases you are dealing with individuals, with human beings. They need to report to shareholders, spouses, boards of directors etc. So when making a proposal, don’t forget to look at it also from their point of view. It may be wise to engage a specialized tenant representation broker such as the consultants at NAI Sofia Group during the negotiation process in order to benefit from the experience of other business, and in order to have an additional layer installed between your landlord and your business. When engaging a lawyer, it is best to engage a specialized and experience real estate lawyer. Any saved dollar is a direct profit in your P&L and many firms’ commercial & industrial real estate holdings do not get optimized on a regular basis, often leaving a lot of saving potential untouched — now may be the right time to uncover such potential.