The Property Description
The commercial property selected for this task is a shop for sale located at St Johns Street, Clerkenwell in London. This is a four-storey Georgian commercial building with a striking ancient look, as shown in Figure 1 below.
The key characteristics of the property include the following:
Size: the gross internal floor area of the building is about 86 m2. It has four stories comprising of a basement, ground floor, first floor and second floor.
Architectural style: this is a Georgian terrace house meaning that it is of Georgian architectural style. The key properties of Georgian terrace houses include: grand proportions, spacious, comfortable, increased sense of light and space, sash windows, high windows on the ground and first floors and smaller windows on the second floor, balanced interior layout, white-painted render, and symmetrical flat exterior. All these properties are resent in the commercial property being analyzed.
Tenure: property has a freehold tenure meaning that the owner has outright ownership of the building and the land on it with no time limit on ownership and does not have any limitations on the use of the property. This presents a good opportunity to improve the property and increase its value.
Current use: the property is currently a mixed-use building. The basement and ground floor houses a luxury beauty salon, the first houses spacious self-contained one bedroom houses with a reception room and open plan kitchen, and the second floor houses a spacious two bedroom houses with a separate bathroom. The apartment on the upper flows has its own entrance.
Neighborhood: the property is within walking distance to Angel station and is near Sadler’s Wells Theatre – the world’s number one venue for international dance. The area has integrated transport infrastructure comprising of rail, road and cycling networks.
There are two main problems with this commercial property. The first problem is that the building needs to be revamped, both inside and outside, so as to make it more attractive and resource efficient. Some defects are visible on the façade or external walls of the building and internal surfaces. Some of these defects include: spalling (rust or water staining), water seepage from the roof (water staining, rust staining, growth of fungus and water dripping), peeling paint, rising dampness. Such defects can be caused by different factors including; poor design, defective materials, poor workmanship or environmental conditions. The second problem is that the current use of the building is not the best considering its location and neighborhood, especially the residential use on the first and second floors. These problems have resulted to low occupancy rates, rental rates and high operating expenses. Thus solving these problems will significantly increase the value of the property.
Strategies for increasing the property’s value
The main metric used to determine the value of a commercial property is net operating income, which is determined by subtracting operating expenses of the property from its effective gross income. Effective gross income includes gross rental income any miscellaneous income while operating expenses comprises of all expenses incurred in the property’s operations excluding mortgage repayment interest or depreciations. Therefore the best way to increase the value of this property is by increasing its effective gross income and reducing the operating expenses. The effective gross income can be increased by improving the property such that both it attracts more occupancy and rental rates. The following are some of the innovative and management ideas that can help to improve the property’s value.
Refurbish the building
Upgrading the building will not only make it more attractive but also enhance its structural soundness, safety and durability. A comprehensive building inspection should be conducted so as to establish the actual defects, their extent and suitable repair ways and means. The renovations should include green flooring, non-toxic finishes, low-VOC paints, etc. Nevertheless, it is important to note that one of the elements that Clerkenwell is known for is the Georgian townhouses. This is like the cultural, social or heritage value of the area. Therefore even if the building is refurbished, this value must be preserved. This means that the architectural style and conventional appearance of the building should not be changed because this is one of the reasons why people visit the region – to enjoy the view of these antique architectural styles. The upgrading should also involve installation of additional features such as safety and security systems. Upgrading the interior and exterior of the property will definitely increase the value of the property by attracting more tenants and increasing rental rates.
Change the building use
This property is located along St Johns Street in Clerkenwell. This is one of the quiet streets that many residents of London and nearby towns like visiting frequently to enjoy the views of the Georgian townhouses and the tranquil atmosphere. This area is known for its deep-seated food venues, vintage treasures, independent stores and former industrial warehouses. Therefore the apartments on the top floors of the building are not optimizing the use of the building. The lower floors can be maintained to be the luxury salon but the upper floors can be changed to a luxury restaurant, clubhouse, leisure club, gym, library and/or corporate lodges. These are businesses that have the greatest potential of ensuring 100% occupancy of the building. They will also increase rental space compared to the current use. The chosen uses should accommodate both adults and children because the area is frequently visited by families, and also locals and foreigners. For instance, if it is a restaurant, it should have local and foreign cuisines, both for children and adults.
Solar energy system
Energy is undoubtedly one of the resources that contribute largely to operating expenses of commercial properties. Installing a standalone solar energy system on the roof of the building will make it energy self-reliant thus reducing electricity bills. Eco-friendlier buildings are undoubtedly more attractive to tenants than those that continue to consume a lot of non-renewable energy because people are now more informed about climate change and global warming problems. Therefore the solar energy will increase the property’s value by reducing operating expenses and attracting more tenants.
Greywater recycling and reuse
Any technology, technique or decision that will reduce operating expenses of the property is advisable. A greywater recycling system can be installed in the building and the water bills will significantly reduce. This will also make the building more attractive to tenants because many people nowadays prefer doing business in green or sustainable buildings. All these will increase the value of the property.
Water and energy efficient fixtures and appliances
One of the best ways to reduce operating expenses is to use resource efficient equipment or systems in the building. Electricity and water are the main resources used in the building hence all existing water and electrical fixtures, appliances and equipment should be replaced with more efficient ones. This includes water taps, showers, lighting fixtures, heating and cooling equipment, and air conditioning equipment, among others. Many business owners are nowadays looking for water and energy efficient buildings hence this improvement will automatically increase the value of the building.
Building management system
Automation plays a very key role in monitoring and controlling electrical and mechanical equipment in a building such as lighting, HVAC system, safety & security systems, motion detectors, and water. Installing a building management system will help in improving indoor environmental quality and thermal comfort and reduce wastage of water and electricity;. This will increase the value of the property by reducing operating expenses and increasing occupancy and rental rates.
Once these strategies are implemented, the owner of the property can negotiate new lease terms with existing tenants or create new lease terms for prospective tenants. Since the property’s value will have been improved significantly, it will be justified to increase rental rates even for existing tenants. Both freehold and leasehold are appropriate tenures for the property. However, in case of leasehold, the lease must be long-term – at least 20 years. Gross lease or fully serviced lease, where the landlord pays most or all costs and then pass them to the tenants in rent, is the best type of lease for the property. This lease type will enable the owner to maintain or keep on improving the value of the property.
Laws affecting management of commercial properties in the UK
Commercial property management is relatively complex and it is important to understand the relevant laws so as to avoid facing legal liabilities and paying their associated costs. Understanding the law helps to avoid pitfalls thus putting property owners in a better position to negotiate for the best terms. The main laws affecting commercial property management in the UK are Land Registration Act 2002, Law of Property Act 1925, and Law of Property (Miscellaneous Provisions) Act 1989. Land Registration Act 2002 makes it compulsory to register any freehold interest transfer or transfer and/or creation of leasehold interest of more than seven years. The Law of Property Act 1925 deals with the transfer of leasehold or freehold land. The Law of Property (Miscellaneous Provisions) Act 1989 governs formalities involved in creating land contracts. This law dictates that land contracts must be in writing and include all relevant terms in a single document signed by the two parties – buyer and seller.
Others laws include the following:
Health and Safety at Work Act – the law requires employers or landlords to put in place measures that will protect the health, safety and welfare of employees or occupants of their properties.
Gas Safety Regulations 1998 – requires landlords to ensure that all gas installation and appliances are properly maintained, which includes annual inspections.
Energy Act 2011 – the law requires all properties to meet a minimum energy performance requirements for it to be eligible for sale.
The above laws must be understood and adhered to when making property management decisions. This will ensure that all management decisions made are in accordance with the applicable laws. The landlord and tenants have legal obligations in relation to property management in the UK.
The value of a property can be increased by increasing occupancy and rental rates and reducing operating expenses. Several innovative and management ideas have been identified of which if implemented, they will significantly increase the value of the commercial property analyzed. These ideas include renovating the property; changing the property’s use; installing a solar energy system in the building; integrating greywater recycling and reuse in the building; installing water and energy efficient fixtures and appliances; and integrating a building management system. Integrating these ideas will make the building more attractive thus increasing the possibility of achieving 100% occupancy, increase the rental rates and reduce operating expenses. The property has a strong potential of creating substantial value considering its location and characteristics. Implementing these ideas will increase the financial or economic value, social value, environmental value and cultural value of the property.