The shift to data-backed leasing is already underway

The move to ban upward only rent reviews in the UK may have come out of the blue, but the reality is the industry now has to look beyond traditional methods for leasing and valuing commercial space.

David Fuller-Watts, CEO at Kinexio

To many people, the concept of an upward only rent review will seem outdated. They were originally introduced in the 1960s to attract more long-term investment into commercial property and support the post-war rebuild and then became commonplace in the 1970s when inflation was rampant. 

They provided a degree of certainty on future of income which was attractive for institutional investors but at the same time contributed to an imbalanced and sometimes adversarial relationship between landlord and tenant.

Fast forward to today and the dynamics have completely changed. Now we talk about tenants as ‘customers’ and space as a ‘service’. For businesses there is a sharp focus on how the space they occupy drives sales and productivity and reflects their values.

The retail sector has been at forefront of this change. The COVID-19 pandemic accelerated a shift towards turnover-based leases whereby landlords and tenants would share the upside when trading well and the downside when trading less well. Leases became shorter as retailers demanded greater flexibility and agility to respond to market conditions. Out of the chaos and disruption of the pandemic emerged a deeper sense of partnership and collaboration.

The next step was to embed more data in the leasing process. A fundamental challenge with turnover-based leases is the collection of sales data. Believe it or not, in a lot of cases this is still done manually with the property owner collecting turnover certificates on a quarterly basis. Not only is this time consuming, there is inevitably a lag as rents adjust according to last quarter’s performance, which might not reflect trading conditions today.

Recognising this challenge, this year we launched an AI-powered sales collection and lease reporting portal that enables property owners and asset managers to see and analyse sales data in real-time.  As the data set builds there is the opportunity for deeper and more sophisticated analysis. You can benchmark stores against others in their product category and across a wider portfolio. 

You can also map sales against footfall heatmaps, car park usage, promotional activities and seasonal factors. You can see which stores are underperforming and could be at risk. This real-time analysis is invaluable for asset managers and is increasingly being shared with retailers as well and is becoming fundamental to how rent and other lease terms are determined. With two years of data you can forecast sales more accurately, creating more certainty around future income and asset valuations. We will soon see the same level of data analysis used in other real estate asset classes.

The pandemic also led to seismic change in the offices sector and placed a new value on day-to-day occupancy as a proxy for demand. But tracking occupancy is one thing, understanding what is driving it is another. Our platform would allow day-to-day office occupancy to be analysed alongside room booking, use of amenities and enlivenment activities - as well as external factors such as the weather and public transport issues. 

Taking it a step further, this data can be shared with occupiers so they can see not only what is driving office attendance but how this maps against their own business performance. Until now, ‘return to office’ mandates have been based on an intuition that in-person working drives productivity, but we should be more focused on collating the data that actually proves it. 

The shift to data-backed leasing is already underway and will only accelerate if government is successful in banning upward-only rent reviews. If we are going to attract more institutional capital to real estate, there needs to be greater transparency on performance as well as stability of income. The sector is still yet to fully harness the power of data in leasing but it looks like soon it will have no choice.

David Fuller-Watts is CEO at Kinexio