Factor flexibility into thinking, says Strutts

Demand for space flexibility from occupiers, which is expected to increase in the coming years, is presenting landlords with challenges because shorter-let property has underperformed longer-let property in recent years as a result of strong investor demand for the security of income offered by long leases.For example, while rental values have grown faster on shorter-let properties in the central London office market, where the demand for flexibility has increased significantly, shorter-let assets had delivered a cumulative return of 91% over the past nine years compared with 113% for longer-let properties.The underperformance of shorter-let property stemmed from yield movement as opposed to underlying rental growth, suggested the Property Futures III - A Flexible Future report.

‘Contractual straightjacket’

Investors faced a conundrum, it added: whether to satisfy growing occupier demand for flexibility or operate within an investment model that performed better when tenants were put in a “contractual straightjacket”.“For many investors the temptation will be to increasingly chase a shrinking base of low-yielding, long-let assets,” the report concluded. “However, for those seeking higher returns, embracing the challenge presented by changing occupier demands will be key to consigning short-let property’s recent underperformance to the past.”Embracing technological innovations alongside placemaking and increased customer engagement was vital to aligning the tenant’s desire for flexibility with strong investment outcomes.

“Over the next decade, investors will need to develop new technology and customer-driven strategies to ensure they can both meet customer need and maintain the consistent cashflows expected of real estate investment,” said Thomas Grounds, research partner at Strutt & Parker.“Investors will face a challenging future in reconciling occupier demands with the need to deliver good investment returns. However, it is far from an impossible challenge.The advantages of technology are not just there to help landlords’ customers; they will also help investors confront and overcome the challenges of the future.”