Be aware of dilaps 30th September 2014

All of the hype surrounding property at the moment may be centred on the accelerated lettings and development market, but there can be no doubt that, as a result of this, dilapidations is firmly on the asset management agenda.
 
Do the UK’s property funds and occupiers have a clear understanding of the right dilapidations processes to adopt to minimise additional capital expenditure costs when taking back buildings? Or are they missing a trick and particularly so when acquiring assets? 

The market has seen a 24% rise in dilapidations revenue instructions in London with an average increase of 13% across all of its 14 UK and Ireland offices. This follows a record year for dilapidations in 2013, where instructions exceeded the 1,000 mark compared to just 727 claims in 2007.

This surge in instructions can be attributed to a number of elements linked to the changing economy, including shorter lease terms and the end of the 25 year lease together with a renewed focus by landlords to recoup costs from tenants.

Cash may be around to make purchases, but money is still tight until valuations rise and asset management is more focused nowadays and lessons have been learnt from the past. As a result of this tougher marketplace, asset managers and landlords are paying much closer attention to how they can utilise dilapidations to minimise their costs and protect the incremental value of an asset. Bidding on assets with residual lease terms is competitive and those buyers with comprehensive dilapidations information are using these potential recovery figures within their business plans and bids to gain the extra advantage.

Lease lengths are changing; the average lease is now 5.8 years, so the interim dilapidations processes are becoming more frequent. It is not something that is happening every ten years but every five years instead and asset managers need to have the right systems in place to deal with these more regularly. Prior to the recession, landlords would often forgo a dilapidations claim, swallowing the costs themselves in order to bring the next occupier in quickly.

Now, however, there is an increased understanding that assets need to be managed to a much greater degree and independent dilapidations advice has become best practice. Agents are playing a much stronger role in driving greater awareness amongst property professionals who now have an improved understanding of the financial implications of buildings being left in disrepair at the end of tenancy agreements.

For years, we have been committed to educating commercial property owners and tenants on the importance of receiving expert advice on dilapidations, when signing tenancy agreements and not just when their terms come to an end. Receiving the right guidance at the beginning of a lease can have significant financial benefits for the business, for both landlords and tenants. It also benefits occupiers by enabling businesses to more accurately forecast expected outgoing costs to ensure they are budgeted for over the period of the lease and are not hit hard when a schedule of dilapidations is served by their landlord.

With over 14m sq ft of floor space likely to become vacant this year, it is paramount that good asset management practices continue to change and a greater level of forward planning is involved as dilapidations is a completely different ball game now.