Property: a total waste of space?

Property, despite often being the second largest cost facing businesses after salaries, is the Cinderella of the boardroom – not invited, left in the corner and rarely considered. This has been brought sharply into focus by a major study carried out by Capital Economics and commissioned by the Royal Institution of Chartered Surveyors (RICS).

The savings identified in the study are large and the implied inefficiencies frightening. The study concludes that UK businesses could save up to £18bn per year through more efficient use of property with a 13 per cent increase in trading profits as a consequence. But how is this number arrived at and how can the efficiencies be spotted and implemented? And where are the savings?

Tenants tend to be more efficient in their use of property than owner-occupiers and this, in part, may be due to the higher transparency of costs for a tenant than for an owner-occupier and the fact that tenants have higher occupational density. According to the RICS, owner-occupiers could save between £7.2bn and £9.5bn a year if they used space as efficiently as tenants.

Money spent on facilities management contributes £13bn or 1.5 per cent of GDP. All businesses have facilities management spending, either directly or through service charges operated by landlords on multi-occupied property. It is estimated savings of £1.3bn a year are available from more efficient facilities management.

The last area of saving worth mentioning is the most damning because of its simplicity. It identifies a possible £300m of extra savings from merely appealing against business rates assessments.

How to achieve savings

The first obstacle to achieving savings is the lack of information business has about its property. Often the company does not even have an accurate asset register, or current market value, of its property. The study shows the benefits of collecting property information in a systematic way and analysing that information so the performance of property can be related to the business strategy as a whole.

With accurate and comprehensive data established, corporate property managers can use tools such as affordability ratios, benchmarking schemes, measuring different types of property costs and occupational density and in-house research. Internal rent charging is a particularly useful, but rarely used, tool to make managers aware of the property costs they incur and to encourage individual business units to take responsibility for costs.

Corporate property managers could encourage more efficient use of space to cut property costs. A proper review of site and building utilisation can identify cost savings and the opportunity to release value from 'surplus' assets.

Ownership structure also has an impact on the efficiency of property usage. In the UK, two-thirds of business property is owner-occupied, with the remainder being leased. If all owner-occupiers were to occupy space at the same occupational density as tenants, the business sector would save up to £9.5bn a year.

Possible reasons for owner-occupiers' less efficient use of their property include the illusion the property is 'free', because there is no rent to remind them that it is not. There may also be an expectation, more appropriate to the high inflation era of the past, that capital value increases will more than compensate for lavish space allocation.

To own or to lease?

Owner-occupiers could achieve more efficient use of space. First, they could choose to lease rather than own, taking advantage of the increasingly sophisticated financial solutions for property ownership that allow businesses to structure their corporate assets more flexibly. Sale-and-leaseback transactions take property off the balance sheet and release cash to invest or reduce debt.

Alternatively, they could remain owner-occupiers but take steps to become better informed about the costs they face and actively manage their property usage in the same way that many corporate tenants, do – keeping complete records, charging the business a full market rent and regularly checking costs and space usage against published benchmarks.

The RICS study is compelling. It's comprehensive and independent, the potential efficiencies and avings are significant and techniques and methods to deliver those savings are available to all types of business.