Mitigating business risk by optimising real estate commitments

15 Nov 2023 04:13 PM

The cost of accommodation is typically among the top 3 cost items in an organisation’s income statement. As accommodation commitments are long-term and substantial, well-informed judgement is required to settle on accommodation arrangements that mitigate business risk whilst enabling the ongoing development of the business.


Transaction optimisation versus portfolio optimisation

In our experiences over many years, multi-site commercial occupiers that adopt a portfolio optimisation regime extract far more value from their accommodation arrangements than do occupiers that attend to an accommodation requirement as and when a lease expiry or a new business requirement triggers the need.  The reason for this is that portfolio optimisation considers real estate commitments and capital allocation at an aggregate level having regard to the organisation’s strategy, a perspective that extracts value at both an individual transaction level and at a portfolio level.


Right locations, right premises, right commercial terms

At LPC, our advice and representation are always directed towards achieving the ‘right location, right premises, and right commercial terms’ for an occupier. As Michael Raymond (head of LPC Industrial) reminds, “When we advise our occupier clients, we emphasise the importance of working towards right locations, right premises, and right commercial terms across our client’s portfolio of leasehold and freehold assets. While much value is gained from ensuring each commitment is aligned with the right location, right premises, and right commercial terms test, a second level of value is mined by focusing on portfolio optimisation as this gives rise to opportunities to reallocate capital via disposals, acquisitions, consolidation, lease restructure, sale and lease-back, sub-lease, rezoning, development, and various other tactical strategies. Systematic portfolio optimisation delivers improved balance sheet health and frees up capital to be redeployed in line with the organisation’s core purpose”.


Effective portfolio optimisation  

Portfolio optimisation doesn’t just happen. It requires a disciplined regime that drives tasks and activities that optimise each transaction and the portfolio.


At the core of this regime is an annual review of the alignment of the portfolio commitments (locations, premises, commercial terms) with the organisation’s strategic plan and business plan.  The test is whether capital allocated to accommodation is being optimally deployed to meet the business requirements and risks into the future. The key outcomes include the identification of portfolio optimisation opportunities together with a project plan to implement these. 


Systematic lease management is an essential foundation for effective portfolio optimisation. As Cara Hayward (Lease Management Head & CFO of LPC) comments, “Portfolio optimisation cannot be achieved without a current and complete lease management database (including lease accounting data) that triggers the right actions at the right time, together with a monthly management regime that oversees the right actions at the right time”. 


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