Cushman & Wakefield: Shift the property burden – Matthew Stone

As companies look to foster growth in difficult times, unused properties can represent a detrimental drain on precious finances and scant resources. Finance Director Europe talks to EMEA corporate finance partner Matthew Stone of Cushman & Wakefield about the process behind offloading commercial real estate liabilities and the resultant benefits.

In today's economic climate, the last thing companies need is the additional headache of leasehold liabilities. Yet, in line with increasing cases of bloated and obsolescent property portfolios, it has emerged as a pressing issue for finance directors.

By continuing to pay for estates that they no longer use or want, occupiers are exposing themselves to substantial liabilities on their balance sheets, deflecting invaluable management time and resources away from central
business needs.

Surplus property can derive from a number of factors, ranging from a change in business direction or M&A activity through to workforce migration across several locations and buildings. However, according to Matthew Stone, a partner in Cushman & Wakefield's EMEA corporate finance team, the problem is principally underlined by a disparity between real estate and business planning cycles.

"There's a fundamental mismatch in every company between the length of its business planning cycle and the much longer real estate lease," he says. "Properties that once fitted certain operational requirements no longer meet them as a result of business strategy changes. As we emerge from the recession, more organisations have right-sized their operational real estate footprint to reflect their current needs, thereby creating surplus properties."

Third-party streamlining

Consequently, companies are on the lookout to streamline their property portfolios in a bid to drive profit. This is most commonly achieved by transferring the relevant corporate costs and responsibilities to third parties, eschewing arduous alternatives, such as subletting, or undertaking expensive refurbishments.

"Occupiers aren't especially keen on going through the rigmarole of trying to negotiate surrender deals with landlords or having to carry out asset management," says Stone. "Instead, they prefer to package up the whole thing and pay someone to take on those liabilities."

"Right-sizing is something that every finance director with surplus properties needs to consider in order to protect P&L and remain successful."

So what's in it for third parties? In return for assuming responsibility for the property, they are remunerated through either a single-reverse premium - often constituting cash receipt or property assets - or over a series of payments.

"Third parties are incentivised, as you would expect, by profit," explains Stone. "They also have the opportunity to beat the business plan and mitigate those liabilities themselves by exercising asset management skills."

Award-winning real estate services

As the world's largest privately held commercial real estate services firm, Cushman & Wakefield is a leader in the field of leasehold liability transactions. Drawing on the expertise of a mix of accountants, financial analysts, investment bankers and surveyors, its EMEA corporate finance team has assisted many big-name companies in the aggregate transfer of around £650 million of surplus leasehold properties over the last six years.

Notable examples in the last 18 months include WM Morrison, Virgin Media, Carillion and the UK's largest distributor of heating and plumbing products Wolseley. Its representation of the latter, which covered 170 properties, resulted in the firm winning the CoreNet Corporate Real Estate Advisor of the Year Award in 2011.

"Cushman & Wakefield's corporate finance team operates where real estate and finance overlap," says Stone. "In order to package up surplus leasehold liabilities, we work on behalf of occupiers to assess the liability, work out the transfer pricing and decide whether the surplus estate is viable for transfers of this nature. Also, through a set of guarantee mechanisms, we ensure that the liabilities do not revert back to the occupier."

Such an approach seems set to remain attractive to businesses - Cushman & Wakefield is currently in the process of pricing up an additional 20 portfolios.

"Over the past few months, I have run five breakfast seminars, which have been attended by more than 100 FTSE 250 companies that want to learn more about it," he says.

"This is something every finance director with surplus properties needs to consider in order to protect their profit and loss (P&L) and remain successful. It is a way of right-sizing your estate without having to negotiate with landlords - a real bonus."

EMEA corporate finance partner Matthew Stone