Strategies for dealing with obsolescence–Jones Lang LaSalle
Jones Lang LaSalle has published a new report: ‘From Obsolescence to Resilience’, showing that while the property industry faces a problem with depreciation and obsolescence, investors and occupiers can gain value through strategic refurbishment and proactive asset management strategies.
The firm has identified three critical factors that raise the risk of obsolescence and accelerate the depreciation of a property asset: legislation; corporate requirements; and workplace technology. Investors and developers must adapt quickly to these risks if they want to maintain solid asset performance, Jones Lang LaSalle says.
The UK Energy Act 2011 makes it unlawful for landlords to lease space and for occupiers to assign or sublet buildings rated F or G from April 2018. Mike Tiplady, director of project and development services at JLL, says there will be value depreciation on obsolete stock as this 2018 deadline approaches, with poorer-quality product likely to have longer void periods, lower rental growth and higher rent-free periods. “Now more than ever, sustainable refurbishment and proactive asset management will be required, with an opportunity for the investment savvy to mitigate these risks.”
Meanwhile, the increased sophistication of corporate occupier requirements mean that office property needs to become sufficiently flexible to incorporate changing technology requirements, and floorplates that can adapt to more collaborative configurations. Buildings that fail to enable corporate preferences will become obsolete for the larger user, JLL warns.
Karen Williamson, senior analyst for UK research at JLL, points out that office building replacement rates across Europe are only 1%-2% a year, which is “nowhere near enough to keep obsolescence at bay”. With finance likely to remain limited for speculative development in the medium term, she feels there is great potential for investors to access “challenging, but appropriate stock” and refurbish it, provided that it is economical to upgrade. She adds that innovative funding partnerships could be formed with occupiers to open up finance for refurbishment, while buildings that become fully obsolete could find alternative uses.
