7 min read
Some businesses have struggled during 2024 due to a sluggish economy. As the year draws to a close many businesses are hoping for an early cut in interest rates in 2025 and the start of a recovery. Following the election of Donald Trump in the US, there are now fears of the impact on the Australian economy, with trade tariffs being proposed with the consequence of interest rate reductions in Australia being delayed to the second half of 2025.
We are seeing businesses battening down the hatches, cutting spending and delaying decisions. Now, more than ever, businesses are looking at ways to cut costs and improve efficiency. Every part of an organisation should be examined to seek efficiencies and drive cost savings. This is a perfect time for businesses to get their house in order and get their cost structure and infrastructure aligned with their sales and revenue.
How can real estate professionals show their value and deliver a reduction in property costs? A year ago it was about keeping inflation under control and to limit cost increases, now it is about reducing cost. In this article we discuss some areas of focus to help deliver savings.
Cost savings are best delivered by being strategic and thinking outside the box. Cleaning the office three days a week instead of five will deliver a saving but scratches the surface and shows signs of desperation which is moral killing. Don’t cut costs that delivers value.
Currently rents are at best flat, and incentives are above market norms. Where a lease is less than 2 years to expiry then start negotiations early. If a property is strategically important and will be renewed at expiry, then look to secure a new longer lease now when market conditions are favourable. The benefit to the landlord is that it derisks the chances of a vacancy and increases their WALE.
If there is longer than 2 years to lease expiry, then Landlord’s may prefer to wait in the hope of more favourable market conditions later. In addition, look to remove onerous obligations such as make good, as this allows make good provisions to be released from the balance sheet to the P&L delivering immediate P&L benefits.
Reactionary property management and lease actions weakens your negotiating position and leads to higher costs. Forward planning delivers lower costs.
Lease flexibility comes at a price so be clear where you need flexibility and where you don’t.
If there is less than 2 years on the lease and you have too much space, then look to renew on part. This may include an early surrender, allowing immediate savings to be realised and the portfolio to be better sized for the business.
Make sure you have a good understanding of your property costs. In particular, check if Landlords have correctly applied rent increases, and that CPI escalations have been properly calculated using the correct quarters. The definition of ‘last CPI published’ can be different to ‘CPI between specific months’. Rounding errors can lead to a growing discrepancy in rent over a number of years.
Check and validate your outgoing charges. Don’t take them for granted just because they increased by only 3% on prior year. Make sure the outgoings are charged in accordance with the outgoing clause, and that management costs are reasonable. If in doubt seek clarification.
When a new lease is entered into, it is important to get the right balance between an innovative fitout and minimising future make good obligations. When space planning, ask yourself: ‘if we had to downsize in a few years, can we easily sublease part of the premises?’. Don’t make your fitout too personal to you - if it is unappealing to another tenant, a future assignment or subletting will be difficult.
Fitting out in a manner to minimise your make good obligation will reduce the annual make good provision.
With a focus on costs and not expansion, it is a good time to find those hidden vacancies and under-utilised areas to consolidate usage and free-up excess space. Technology-enabled workplace solutions will enhance efficiency gains, even if staff departures increase short-term churn costs. Reducing these churn expenses will be challenging but critical.
In a weak or falling market, it is important to stay ahead of the market - don’t follow the market. Price space for subleasing competitively but be careful of the accounting treatment of a loss making sublease.
Now is the time to get your house in order and ensure you have an effective and cost efficient property portfolio. Don’t wait until there is a pending lease expiry to make decisions. When we work with corporates we are constantly looking to see how a change in the business should be reflected in a restructured property portfolio.
Property Beyond can provide specialist advice with regard to negotiating leases, interpreting leases and lease disputes. If you are a tenant seeking to minimise risk and cost then please contact Property Beyond on 02 8094 1999.
