The best strategy for blue-chip tenants
The make-up of a blue chip tenant reveals quality at its core.
By Anna-Marie Smith
Blue chip tenants associate themselves with the same values as other blue-chip entities, who all proudly uphold stable track records through economic ups and downs. Their contributions as tenants and occupants of buildings owned by large companies not only reflect in the financial results of property owners, but also directly into the hands of shareholders.
Model tenants have access to sound yet costly management strategies. This traditionally comes as the result of an association with commercial property owners in the listed sector. Highly rated tenants play a major role in the lives of property managers responsible for maintaining low vacancy rates while containing lease expiry periods. Broll Property Group Divisional Director, Asset Management Heidi Rix says well structured lease agreements is the most important business operating principle with which to achieve long term capital appreciation of properties. “Leases need to be structured to offer the best possible business case to both parties to maximise tenant retention. Especially when considering Blue Chip tenants who are often ‘hunted’ by competitor landlords for new developments.” She says flexibility within return and risk constraints on the part of both parties, is also essential. This highlights a risk factor, since losing a blue chip tenancy often means a large vacancy, in particular in the case of purpose built spaces.
Rix says Broll values strong tenant relations through applying flexibility and pro-activity in meeting on-going business growth requirements. Another added benefit says Hix is that building valuations are less conservative when a secure blue chip tenant occupies the majority, if not all of a property. “Tenant rotation and shorter term leases are often avoided with blue chip tenancies, as they too prefer security of tenure for their business operations which improves risk factors and capitalisation rates applied during valuation.” says Rix.
While guarding corporate images and bottom lines, blue-chip tenants have many reasons for accommodating top rated staff in superior quality buildings, be it offices, mixed use, industrial or retail facilities. They have reputations for demanding high quality management and products, which fit in with their own company philosophies. Common trends among those occupying top rated buildings in prime locations include premium class working environments for building occupants.
Establishing energy savings strategies and early implementation to boost bottom line earnings are increasingly becoming highly rated among exclusive tenants. Another trend observed among employees of blue-chip tenants is consultation processes between management and staff regarding building improvements. Following the latest developments of sophisticated energy saving measures, occupants and owners are now able to retrofit old buildings to reduce utility costs. In some cases, the implementation of green building practices is considered to impact positively on productivity levels of employees, due to a healthier working environment.
Blue-chip tenants are typified by driving up demand for rentals in prime locations at multinational levels. They take pride in retaining 100% occupation records, early renewals of long leases and show a preference for properties with internationally recognised star ratings. Both green building and reduced energy consumption practices provide prestigious rental space for businesses that are held in high regard among industry peers.
Broll’s Rix says blue chip tenancies show a tendency to lead the market in aspects like greening, building efficiencies and image, all of which can dictate the design of new as well as refurbished buildings, in providing leading world class assets. “The challenge however, is whether the tenant is willing to pay the increased premium which is often shared between landlord and tenant, marginally reducing the initial yields.” She says these high building costs could drive rentals considerably higher than market to cover loan repayments.
However, some property investment funds view buildings that are in high demand, such as AAA graded properties that are typically occupied by blue-chip tenants with long leases, to have limited potential for capital growth. As a result, these are not necessarily the target market of large property owners. For Vunani Property Investment Fund, A and B+ grade properties offer wider investment choices because not only do they attract lower rentals, but also offer greater potential for redevelopment and improvement over the long term.
What blue-chip tenants also have in common with property owners and managers is seen both from an occupational as well as an operating perspective. They are required to motivate and justify high rental expenditure to discerning decision makers, while those placing them into buildings have to answer to equally demanding boards of directors and shareholders. Both sides are required to maintain the highest standards of management to accommodate every need of those whose priorities are dominated by income growth.
On a global scale, these tenants are a sought after commodity in the competitive world of property. Their actions are typified by long-term planning, stringent capital expenditure and management control, in particular in the case of owner occupiers, who have the added responsibility of maintaining income distributions to shareholders.
Added corporate status is derived as the result of blue-chip tenants who are able to prove confidence in managing financial risks for optimum profits. They employ the services of highly paid property management experts to control operational costs and long-term forecasts. This, while protecting the well-being of carefully selected teams of employees worth a fortune in intellectual property.
However, one of the biggest threats to those who compete for the attention of valued blue-chip tenants is new property development in popular business nodes. It is said that when growing pools of landlords compete for the same number of blue-chip tenants, rental prices are driven upward.
Central geographical locations close to business nodes are one of many marketing highlights of blue-chip rented properties. Areas high in demand include Sandton, where the Gautrain station is in close proximity to the workplace, and others near main traffic areas close to freeways. Rivonia Boulevard and Hyde Park near William Nicol Drive enjoy 100% occupancy rates. In Cape Town, central city locations attract top tenants in particular at mixed use developments. High occupancy rates and long leases held by blue-chip tenants are seen at the V&A Waterfront, Canal Walk and Century City, where prime office space is located close to retail facilities.