Achieving a strong return on investment (ROI) is crucial to long-term profitability and success in the commercial property market. A robust ROI can lead to increased profitability, stable income and the ability to expand your property portfolio.
Challenges that have become ever more complex during the current economic climate include high interest rates and inflation. Changes in demand brought on by the pandemic mean that now more than ever it is important to focus efforts on maximising profitability of commercial buildings.
Rental income, property appreciation and cost management are key components to optimising an initial return. However, to maximise ROI in today’s competitive market further strategies should be considered.
Rental yields can differ greatly, dependent across several factors. Research has found that the strength of investment not only depends on the region, but sector as well.
Savills October 2023 Market in Minutes report reveals that all major urban office markets have seen prime rental growth in the last 5-6 years, averaging 6.4% per annum over 2019–2022. Prime logistics rental growth over the same period has averaged 8.1% per annum, and recently there has even been some rental growth in parts of retail.
However other parts of the market are suffering. The tenants that are opting for spaces in prime spots are often moving out of secondary locations, creating high vacancy rates amongst less sought after locations.
Streamlining operating expenses
Efficient property management can help decrease outgoing costs and improve profitability. Property management firms can provide support in addressing tenant concerns or maintenance issues before they become too costly. You may want to consider partnering with a certified firm; so that property managers are well-equipped to develop and maintain budgeting and financial strategies for your properties. This will ensure that overheads are managed with ROI in mind.
Due to updated compliance with MEES regulations, many are choosing more sustainable operational solutions. It is estimated by Savills that one billion square feet of office space needs upgrading to meet the government’s energy efficient deadlines.
Choosing to invest in refurbishments presents an opportunity to maximise energy efficiency, improve insulation and avoid costly penalties by complying with current and future regulations in a timely way.
And, with a range of funding available for commercial landlords, there has never been a better time to upgrade. Landlords who are investing in energy efficient building solutions can raise the value of their properties while also achieving ROI and cost-saving measures.
Reduce vacancy rates
In a challenging market, it’s essential for landlords to focus on retaining and attracting tenants to reduce vacancy rates. It is estimated that office space in London currently has a vacancy rate of 8.7% (Savills). Providing flexible lease terms and incentives can help meet existing tenant needs and encourage them to renew their lease.
To attract new tenants, landlords are offering rent free periods or low introductory rates. While ROI may take a hit initially, for a highly qualified tenant the disadvantage of a three-to-six month concession pays for itself in the long run.
Make the most out of your space
An office fit-out can be a key driver in enhancing ROI. Many companies are rethinking their need for a large office space, bought on by the switch to hybrid working. However, recruitment firm Hays has found that the provision of high-quality office space remains important to assist with recruitment, retention, productivity and employee wellbeing.
There is currently a demand from well-established SMEs opting for short-term lease and plug-and-play options. This offer is more attractive to businesses who are seeking flexible space in the short term.
By offering ready to work office spaces, you can increase ROI of properties in some of the following ways:
- Attractive office spaces – A well designed office that is fit for purpose is more likely to attract high-quality tenants that are willing to spend more on their office space.
- Future proof upgrades – Ensuring your space has up-to-date tech and fixtures which will reduce operational costs and long-term maintenance costs. For example investing in an energy efficient heating system could reduce bills. Also as ESG becomes a bigger priority for businesses, sustainable spaces can be seen as more attractive.
- Increased rental income – Properties that have been refurbished often command higher rental rates compared to older spaces. They also hold a competitive advantage in the market.
- Improved tenant retention – A fit out can be an excellent opportunity to strengthen existing relationships with existing tenants. By enhancing shared facilities, upgrading amenities and incorporating feedback, landlords can demonstrate their commitment to tenant satisfaction.
- Asset value appreciation – Investing in a fit out can lead to an increase in the overall value of the property. A higher value property not only increases portfolio net worth, but also offers future benefits in terms of sales, financing opportunities and attracting investors.
In today’s changing work environment, it has never been more important to ensure your space is able to attract the right business to increase profitability of your portfolio.
Get in touch with our team at Kerr to discuss how we can help maximise the ROI of your space.