In April 2016, inspection of an industrial unit at Aldermans Green Industrial Estate, Coventry, identified potential for extension to the occupiers lease term and has culminated in disposal of the property asset to Coventry City Council, on behalf of owners Real Estate Investment Trust.
Drake Howard Property was asked to provide advice and recommendations on the tenancy on the premises; the condition of the building and; the value of the long leasehold investment at Dutton Road, acquired within a portfolio of properties. The site and buildings are occupied by PHS Group as a cleaning facility for washroom mats, at properties across the Midlands and North.
“On my initial inspection, I was impressed with the substantial adaption of a high bay, former engineering works and the capital value of equipment installed by the tenant”, said Martyn Howard. “Management personnel at the building were kind enough to talk me through the digitised cleaning process and distribution logistics over the region, which stretched as far north as Yorkshire and east to Norfolk.
It struck me the key question to the likelihood of the tenant remaining in occupation beyond expiry of their current lease was the value of the cleaning machines and their useful life. Each laundry machine when purchased cost £1m and life expectancy was seven years plus. At the time, the PHS Group lease had just over 3 years to expiry.”
With the benefit of this information and our recommendations, REI considered a strategy to open discussion with the tenant to extend the lease on the premises, at a market rent. The incentive, being a reduction from a higher passing rent. The driver, being an improved investment capital value of a longer income stream, secured on a solid tenant covenant.
Negotiations proved successful and the lease was extended by 5 years, to July 2024 at a rent of £88,000 per annum. The triple bay building with front office pod, has a gross internal area of 15,825 sq. ft. So, the new rent equates to £5.56 per sq. ft.
On completion of the lease, thoughts turned to disposal of the long leasehold interest. However, achieving maximum value was compromised by the approach of a ground rent review, due May 2017.
“I was able to suggest to our client, we try to ‘kill two birds with one stone,’ by using my contacts with the freeholder, to promote buy-in of the long leasehold, in an off-market deal. My contacts at Coventry City Council were receptive to the idea and a price was agreed fairly quickly with the agent, Lambert Smith Hampton.”
Condition and management issues arose during the due diligence process. However, the experience of Drake Howard Property in remedial building works and lease protocols, was put to good use in resolving the complications and the sale was completed in August.
“In terms of outcomes from the instruction, I believe we have a happy tenant, a happy purchaser and a very satisfied customer. Not a bad return at all,” Martyn concluded.