As the call to repurpose and revitalise the grey space market grows ever louder, I investigate what this means for owners of office centric real estate.
CATERING TO A POST PANDEMIC WORKFORCE
It is safe to say that the grey space market has experienced a shake up in the past year. Whilst many still hold a firm belief that nothing beats face to face teamwork, the majority of businesses seem resigned to the fact that, to stay competitive as an employer, they must continue to provide enhanced work life balance that many employees have now experienced. The most likely route for many businesses will be a hybrid between working from home and the office, which will inevitably mean a reduction in office space lettings. Landlords will be keen to keep hold of corporate tenants, but the savvy will recognise the need to both spread the risk and ensure that the office spaces they bring to the market offer more than just a desk, kitchenette, and bathroom.
LIVE, WORK, PLAY
In the residential market, many customers expect an array of amenities all under one roof, including gym, cinema, cafe, launderette, gardens, and co-working space. This ‘lifestyle’ transition is happening in the commercial sector as well. You only have to look to experience-led retail and vibrant co-working spaces to see this in action in the commercial environment also. I believe that the pandemic has sped up this process significantly. What was once a luxury will now far sooner become an expectation, particularly within offices in prime city centre locations, and landlords need to be ahead of this.
Commercial landlords looking to spread risk are diversifying from offering strictly office spaces to having a diverse mix of tenants and vendors all under one roof. Mixed use diversification usually includes complimentary service offerings to appeal to the work force and create a community centric space, such as well-being zones, fitness studios, events space, food & beverage, beauty salons, art studios and retail. There is a growing trend for spaces that can be converted easily with temporary walls or movable room divides to ensure it can meet different uses depending on the time of day, and an unstable market will ensure that potential tenants will value flexibility. Young companies require spaces with reasonable fit out costs and a space’s ability to act as an incubator for fresh concepts can generate a welcome hype amongst other tenants, as has been demonstrated by the pop-up phenomenon in retail.
ARE SPECIALIST OPERATORS THE KEY?
Caution is advised for landlords when it comes to structuring the operational side when converting office space to mixed use. Fulfilling a landlord/operator hybrid role for a commercial space in which all floors are occupied by office tenants is one thing. Converting the excess office space to appeal to different types of tenants and manage a diverse collection of spaces requires one or more specialist operators. Landlords will do well to recognise the need to invest in outsourcing these specialist skills for a better chance of success.
WHAT DOES THE LENDING LANDSCAPE LOOK LIKE FOR FLUID MIXED USE REAL ESTATE?
A term being bandied about currently is the ‘hotelification’ of office buildings, with enhanced amenities including improved food and beverage offerings alongside members club style amenities. Some landlords may choose to take this a step further and add a residential offering with onsite rooms to rent.
Even if landlords decide to add a residential element, any mixed use or semi-commercial space borrowing will be treated as a commercial mortgage. Lenders will assess the business plan or require a financial forecast of the potential rental returns. As discussed, the office space market has been hard hit by the pandemic so innovative spaces that can accommodate a diverse range of tenants and demonstrate demand aside from just those seeking desk space could prove to be a more appealing lending option in the current market.
BRING IN THE EXPERTS
The current environment presents many potential variables, so it’s important for investors to consult a specialist debt advisor, or commercial mortgage broker, to structure a bespoke debt package whether this be for acquisition, development, refurbishment, conversion or refinancing.
An advisor that understands the mixed-use commercial space will be able to navigate the crowded lending market to find a product to suit the budget and LTV requirements and a lender partner able to give an investor the best chance of making a success of their space, as well as offering greater flexibility further down the line should any issues arise.
There is much opportunity for the acquisition of prime office space currently but to create a viable business, investors are having to be more strategic, consult experts, collaborate, and know their target market better than ever. Whilst we cannot eliminate David Brent-esque characters, the stereotypical dreary grey office so perfectly immortalised in The Office is set to become an endangered species. The office is getting an inspirational, healthy and reenergised makeover to match the modern-day workforce and I am certainly here for it.
Sirius has strengthened its Structured Finance team with the recruitment of Hari Patel
Hari has worked in finance for 31 years with more than a decade of experience in property, including roles at Coreco Specialist Finance and Knight Frank. He joins Sirius as Senior Associate – Structured Finance to assist developers and property investors across various asset classes including residential, mixed use, PRS and senior living.
Nicholas Christofi, Co-Founder at Sirius Property Finance, says: “‘We are continuing to build an unrivalled team at Sirius and I’m delighted that we’ve been able to attract another industry heavy weight. Hari is very well known and respected within the structured finance space, and his skillset and expertise will further enhance a core division of our business.”
Hari Patel, Senior Associate – Structured Finance at Sirius Property Finance, said: “It’s great to join a team with such a fantastic reputation as Sirius and I’m looking forward to leveraging my experience, expertise and professional network to add value to the business and its clients. I’ve developed a reputation for being tenacious with difficult cases and finding a solution where others have failed, and this is an approach that is shared by all of the team at Sirius.”
Last month in England, our pubs and bars finally threw open their doors to welcome us back inside for that much missed pint.
However, Government guidelines remain with punters and landlords asked to adhere to rules including capacity being restricted in line with social distancing and table service only.
In view of the new “rules” some establishments continue to struggle, especially those with smaller premises. Will they re-open at all? There has been talk of only two in five pubs opening. Near the Sirius Property Finance office in the City of London, you cannot help but feel saddened when at 1:30pm on Friday lunchtime you walk past, once thriving, pubs whose doors remain shut, lights off and stools stacked.
Some publicans have benefitted from Bounce-back Loans (BBL’s) and CIBLS Loans, as well as the Government’s Furlough Scheme. Whilst this support has been welcomed and benefitted many, is it enough? Some operators have adapted and introduced a takeaway service which has been a huge success and is likely to remain a permanent feature. Some, situated outside of residential areas, are less able to capitalise on this.
One problem facing many pub and bar owners is that whilst some support has been available, most High Street Banks have amended their lending policies to more conservative levels and others have pulled out of the market all together.
However, it is not all “doom and gloom”. At Sirius we have been busy supporting our clients by finding commercial solutions to assist experienced operators to purchase new businesses, or refinance to release equity for capital expenditure or expansion. Where the High Street may have lost its appetite to support the Licensed Leisure Sector, there are alternative lenders and Challenger Banks who remain consistently supportive and will be more willing to take a flexible approach on lending to viable businesses and borrowers. Many are focussing on “pre-COVID” trading figures to access debt serviceability and in principle, are lending on average up to 65% loan to value (against the Freehold going concern value).
With several pubs closing, opportunities are created and whilst some will be snapped up by developers for conversions, I would like to think that many will be acquired by seasoned operators looking to expand or embark on a new venture to meet the pent-up demand. This has led to many asking us the question – can you get finance to purchase a closed pub? We have access to lenders who, if the proposal makes sense, will support such a purchase, again with debt of around 65% of the property value. Often interest can be ‘rolled up’ providing an ideal short-term steppingstone until the business is open, trading and generating sufficient cashflow to support a Term Loan over approximately 15-20 years.
Post-pandemic, the lending landscape for pub financing has never been more of a minefield thus partnering with a real estate finance brokerage who have strong relationships with specialist lenders and who genuinely understand the niche sector is proving invaluable.
Landlords, front of house, chefs, bartender, and cleaners alike are all working overtime and need your support more than ever to make the effort worthwhile. A recent study has estimated that every adult in Britain needs to consume approximately 124 pints of beer (or 976 packs of crisps) to save our pub industry following the pandemic. If ever there was an excuse to get down to your local establishment, this is it.
Chris Field, Head of Care and Hospitality, Sirius Property Finance
In light of mental health awareness week and the continued effects of the pandemic being prevalent, mental health is in the spotlight more than ever before. The Centre for Medical Health has estimated that an additional 500,000 people will require support for their mental health in the next two years. From a real estate perspective, this inevitably leads to increased demand for residential facilities to provide care and respite to those in need of further support.
A Learning Disability (LD) or Mental Health (MH) Home is a residential care home that provides personal care and accommodation for adults with Learning Difficulties and/or Mental Health conditions. These types of homes are classed as “specialist care” and there is often a range of care provided depending on the residents’ individual needs. Some residents might require minimal care, such as basic personal help and accommodation, whereas another resident may require more constant/involved and as such is best suited to a care facility which offers 24-hour support. This level of care promotes a long-term residency, with the tenants considering the property as their home. Therefore, placing increased importance on an owner’s ability to keep the asset stable and provide continuity in housing potentially vulnerable adults.
The continued growth of LD and MH presents an appealing investment sector for lenders including some of the high street banks. However, lender’s criteria have tightened up over the past year with CQC rated ‘Good’ homes being sought after and, often, a must have criteria for these mainstream lenders. Homes with a ‘requires improvement’ or ‘inadequate’ rating will be considered by more specialist and niche lenders but due to the complexity of the facilities, they will usually expect the borrower to be an experienced operator with a successful track record of turning around said homes. It is important to work closely with experienced Sector Specialists within the banks, who genuinely understand the market to achieve the most competitive loan terms.
There is currently a shortage of beds in MH homes and high demand where many boroughs are under-serviced. The workforce has had little growth over the past 10 years (BMA Report) and the number of mental health cases continue to rise, with 1 in 4 people said to experience mental health problems of some kind each year in England (Mind Charity). Therefore, this type of asset class can often meet a lenders’ social responsibility targets as these homes are a valuable addition to communities and can provide crucial housing for vulnerable adults.
Regarding the availability of finance for potential borrowers in this sector, Lenders are typically looking at 60%-70% Loan to Value against the Open Market Value of the business as a standalone asset. For an existing operator looking to expand their care home business, there could be several avenues open to help maximise their lending ability.
So, what does 2021 look like for this sector? We are expecting to see several operators looking to refinance over the next year and expand their portfolio to meet both existing and anticipated demand. The sector is understandably likely to attract investors given that there is much opportunity here however, they will find that there are often significant barriers to entry due to the high regulatory requirements associated with the Sector. To stand a better chance of entering the market, investors would be wise to identify and onboard a credible and experienced care operator, to ensure that they are able to deliver the high standard of service warranted.
Sirius Property Finance has partnered with Chris Field to lead the debt advisor’s new Specialist Business Finance Team, specialising in the Care and Hospitality sectors.
Chris has more than 28 years’ experience in the finance industry, having previously held roles at a number of high-profile institutions including a corporate debt advisory firm, a specialist city broker, Lombard, Alpha Bank and Barclays.
In his new role as Head of Care & Hospitality, Chris will lead and grow the new Specialist Business Finance Team for Sirius, which includes Emma Vanson who joined the debt advisor in March to specialise in the care and education sectors.
Nicholas Christofi, Co-Founder at Sirius Property Finance, says: “‘Chris is the perfect choice to lead and grow our new Specialist Business Finance Team. His meticulous and transparent approach has made Chris the go-to broker in the hotel and care sectors for SME and corporate borrowers alike. Having won several accolades during his time in the industry, Chris has carved out a remarkable reputation within his extensive network for his knowledge and always going the extra mile for his clients. We believe his expertise within the care and hospitality lending market is second to none and we’re delighted to have him on board to help us to further support these sectors.”
Chris Field, Head of Care & Hospitality at Sirius Property Finance, said: “The hospitality industry has clearly had a tough time and needs funding more than ever, but it is still seen by savvy investors as a great long-term investment that will present many opportunities as the sector recovers. Sirius has recognised the importance of this market and also the niche requirements of the sector. My team and I will bring the necessary core expertise and contacts within the care, education and hospitality markets to support our wider commercial team.”
Sirius Property Finance has moved to new, larger offices in London and Manchester to enable the continued growth of the bespoke and specialist property finance broker. In both cities, Sirius has moved to new offices with three times the capacity of its previous space, top-end features and facilities. The new offices will provide Sirius with the space to grow the business as it continues to take on new advisers who are able to structure creative solutions for complex client requirements. In the immediate future, Sirius will be recruiting two brokers and one administrator in London, and one broker and one administrator in Manchester.
Robert Collins, Co-Founder of Sirius Property Finance, said:
“In a relatively short space of time, we have delivered really significant growth at Sirius, but it’s the way we have achieved this that is particularly pleasing. We have remained committed to targeted recruitment of some of the best people that our industry has to offer, and we have scaled our business in a controlled way, built on mutually beneficial partnerships. Our new London office is a fantastic space and testament to the quality, vision and potential of the people we have in this business.”
Adele Turton, Co-Founder at Sirius Property Finance, comments:
“In the 18 months since we started Sirius Manchester, we have gone from strength to strength, meeting the bespoke and complex finance requirements of investors and developers from all over the country. We have recently moved into our new larger offices and we are building a dynamic, versatile team to mirror this new exciting space. As with London, we are now looking to add to our team, with like-minded people and the new office expansion fits in perfectly with our plans for the future here.”