5 factors impacting your asset for successful repositioning

Whilst many sectors have boomed (Living, Logistics, Life Sciences) others have been hit hard. The result is a growing quantum of oversupplied and in many instances obsolete space. Asset repositioning provides the opportunity to replace under-utilised real estate with better performing alternative solutions. Sounds simple right? Whilst these projects can see strong income growth and improved liquidity of assets, there are many hurdles along the journey which eat away at margins and quickly erode viability. Below, we cover the 5 key factors impacting the profitability of asset repositioning.

No matter how poorly performing an asset or your desire to attract new income opportunities, successful repositioning comes down to supply and demand in the micro location. Understanding the local market drivers is essential to determining if alternative opportunities exist and whether further detailed repositioning work may yield returns. Proximity to transport, town centres, employment, universities and road links all play a major part in the likely end user.

Local planning policy in many locations is still very protective of change of use in town centres. Whilst the new E Class has allowed greater ability to convert between retail, office and non-residential uses, a detailed and often costly planning application will be required for development of scale. A good understanding of local policy and early engagement and relationship building with local authorities are important first steps. For town centre locations, the best planning permission will be driven from proposals which balance financial returns with social value to the community.

This can be a costly exercise and tenants are wise to the opportunity that an early landlord break could mean a hefty pay out. Vacant possession is key to unlocking development opportunity and underwriting your costs. Underestimating this in the early stages of strategy can have a huge impact on viability. As occupiers look for more flexible lease terms in a post COVID world, there is greater opportunity to prioritise lease breaks over longer lease terms. Looking at transactions in the past 18 months, having a clear vacant possession strategy will absolutely drive liquidity and potential sale price; if sale for a repositioning development is your goal.

This relates to both complexity as well as cost to demolish and can significantly impact viability. Whilst you may have strong demand from offices or residential developers, by the time you either add the structure to build above or look to demolish the existing building (one to be avoided due to carbon impact), underlying land values can be eroded. Construction is benefiting from technology and the likes of modular will allow us to build lighter and faster. However, the cost to ‘reposition’ is complex and is the reason we have seen far more retail parks (low density) being redeveloped than we have offices, car parks and shopping centres.

By the time you work through all of the costs and constraints detailed above, in many instances this will have eroded returns, making development unviable. For all the talk in the media about repositioning, the limited projects actually under construction are focussed in the South East where values are higher. To overcome this hurdle, public and private partnership will be key to ensuring progress is made. As the quantum of vacant space grows and we continue to have an undersupply of quality housing and employment opportunities, public investment and funding will be key to moving the viability needle, unlocking resilient places of the future.

JLL’s Asset Repositioning Team (ART) lead a cross-sector taskforce to provide innovative strategies to enhance and unlock alternative use values. This can include change of use strategy, joint venture opportunities, diversification or replacement of income and ultimately drive liquidity. In the past 12 months, this team has provided strategic advice or transacted on 59 assets across the UK, with combined book values in excess of £1bn, utilising JLL’s expertise from over 20 different teams across the business.