Despite the link between tenant satisfaction and investment performance, some industry customers feel undervalued. Howard Morgan asks why
On the same day that the latest figures from the Strutt and Parker/IPD Lease Events Review were released showing that the propensity of tenants to exercise their break option was the highest in the 10-year history of the study, I heard the CEO of one of the UK's leading REITs describe the relationship between landlords and tenants as akin to an "abusive marriage".
Now, while there are not many investor landlords that would admit to "abuse", the evidence from the recently published second UK Occupier Satisfaction Index shows that there is a long way to go before occupiers feel as if they are being treated as customers. I ask the simple question, can any industry where 43% of its "customers" do not feel valued be optimising returns for its investors? I have often heard the argument that the property industry is different, but can it be the only industry on the planet where satisfied customers do not yield higher returns for investors?
In my work advising property owners and managers on implementing customer service strategies I meet two sorts of investors, those with an intuitive understanding of the link between service and performance and those who will take a neutral or even negative stance, believing that customer service does not improve property returns.
There is encouraging news in the UK Occupier Satisfaction Index for those investors that have taken the intuitive decision to invest in service. This includes some of the UK's leading investors, such as PruPIM and Legal and General Investment Management, and REITs, such as British Land, Land Securities and SEGRO.
Occupiers are beginning to report that they can see the larger landlords differentiate themselves from the rest of the pack and that this is having an impact on which landlords they prefer to do business with. As one major corporate says: "I want to build a longer-term relationship so I can do business with people I trust."
This approach makes even greater sense as we continue to see lease lengths shorten and vacancy rates rise. The Lease Events Review has further challenging news for investors with renewal rates at an all time low and rental voids after lease expiry hitting a high of 57% against a 10-year series average of 40%.
So, what do investors need to do to build confidence and differentiate themselves in the eyes of occupiers? The UK Occupier Satisfaction Index 2008 (www.occupier-satisfaction.co.uk) identifies five actionable areas.
Flexibility: Occupiers welcome the gradual shortening of lease lengths and the availability of more break clauses. Significantly, 36.3% of occupiers think that lease flexibility in terms of lease length and ability to break has improved in the past year.
However, occupiers continue to express frustration about the ability to assign and sub-let. They say that the restrictions landlords impose on assignment and sub-letting are too rigorous, and that the bureaucratic process required for obtaining consents is too lengthy and complex. In contrast with other countries, restrictions in the UK are considered archaic.
Occupiers perceive that compliance with the Code for Leasing Business Premises in England and Wales is patchy and want to see compliance become standard across the property industry, with property professionals such as letting agents and solicitors also embracing it. Others feel that the voluntary status of the Code means that it lacks teeth.
Partnership: Occupiers perceive improvements in communication and in the property industry's understanding of their needs but are looking for closer, partnership-style relationships which are consistent throughout the life of the lease and an end to the ‘let and forget' style of management. They want property owners and their agents to go beyond understanding their needs and to demonstrate that they understand by taking the appropriate action. Smaller occupiers feel particularly undervalued by the property industry.
Responsiveness: Satisfaction with responsiveness shows some improvement but two in five occupiers remain dissatisfied. Satisfaction tends to be higher when occupiers are kept well informed. Occupiers say they are frustrated with the time taken to win approval to assign or sub-let a lease, or obtain consent to carry out works and also feel strongly that the costs they incur are too high.
Sustainability: Sustainability is the big topic of the moment and over half of occupiers perceive that progress is being made by the property industry in implementing best practice in environmental initiatives. Occupiers now want to see the "green-talk" translated into action. Some believe that it is occupiers and legislation that is driving the change, and that the property industry needs to be more proactive. They question what can be done to make existing building stock more sustainable and who will pay.
Value for money: Occupiers welcome the revised RICS Code of Practice for Service Charges in Commercial Property, and are cautiously optimistic about its adoption by the property industry. They recognise that compliance with the Code will take time, but perceive that the larger landlords and agents are adopting it faster than the smaller organisations. The voluntary nature of the Code is seen as a limiting factor for some.
Where do you start if you want to become a customer-focused investor?
One source of information is Real Service (www.real-service.co.uk) the customer service benchmarking and self-help group that was formed four years ago with active support of the British Property Federation. This not for profit membership group now includes over 40 owners, investors and managers. The group has established a series of programmes to benchmark aspects of customer service and in particular has developed a scorecard of 25 areas of best practice in customer focused property management. In addition to providing a forum for sharing best practice, the group has embarked on an ambitious programme to uncover the link between customer service and property performance.
While it is still early stages in this journey of discovery in the UK, there is encouraging evidence from the USA. An analysis by Kingsley Associates of the performance of two similar office investment funds, both with around 6m ft2 and 30 assets, has revealed that the portfolio with the higher level of customer satisfaction is achieving a 6.4% higher level of tenant retention, worth $17m over five years.
The question for investors is - are you going to wait for the empirical proof or is now the time to take the ‘intuitive leap' and make customer service part of your toolkit to maximise tenant retention, increase loyalty and cash flow during the credit squeeze?
Howard Morgan is managing director, real estate performance consulting, at Kingsley Lipsey Morgan