Distressed Commercial Opportunity Fund Acorn Property Group
The Vision
“To purchase a portfolio of distressed commercial investments and asset management opportunities to a value of £200 million, at a substantial discount to value, which will provide a sustainable income of 10% plus, with projected value growth of 40-50% plus in the next three to five years. We will take advantage of the market disruption caused by evolving work practices, interest rate changes and new energy performance restrictions making the majority of current offices redundant, to buy distressed commercial assets. We will target sustainable sites in prime locations with multiple alternative uses, which also meet today's energy requirements and social and technological work practices.”
Melanie Omirou Executive Group Managing Director, Acorn Property Group
01
The Opportunity
The Opportunity “Uncertainty in the office sector due to change in work practices, along with interest rate rises and forthcoming energy requirements, has led to a number of high-quality sustainable assets becoming available at discounted prices.
Existing landlords and passive investment funds, faced with vacant buildings that require energy efficiency upgrades, do not have the skills or available funds to deal with the challenges. As a result, many buildings are being sold at a significant discount to inherent value. Acorn has been able to agree and acquire these highly discounted prime commercial assets with potential for higher ERV’s upon repositioning and refurbishment. These assets are high yielding, well located commercial assets which in 3-5 years’ time will become “investment grade” products ready to be sold.”
Dane Cummings BSc (Hons) MRICS Head of Commercial Property, Acorn Property Group
Savills World Research – Office Market Trends (November 2023)
"The dynamics of the office market are undergoing a profound transformation. Looking to the future it's clear that a proactive and adaptable approach will be essential to navigate these changes. Central to this is the provision of top tier offices and the strategic repurposing of lower quality assets."
"Most organisations continue to need an office; they just want a good one. That means an energy efficient workplace that can help them meet ESG obligations. It means a flexible area with plenty of collaborative space to meet the needs of a hybrid workforce. It means an attractive office close to amenities that can help businesses appeal to younger talent."
"Office-based employment is projected to rise by an average of 12.1% [across London and other major cities] over the next decade, creating new demand for high quality office space."
02
Why Commercial Office Space Now?
Why Invest in Commercial Office Space Now?
The desire for high quality fitted space in the right locations with good transport links and local amenity offering has created, what agents such as JLL have coined, “a flight to quality”. The difference in market rents achieved for such space has increased enormously and the gap between CAT A to CAT A+ (white label plug and play) rents has increased to as much as 25%.
According to the Financial Times in July of this year, analysts say the commercial real estate market has split, with strong demand for high-quality buildings in desirable locations that meet environmental requirements, while there is a lack of interest for others. “A great space is an asset to a business… if they pick the right one, they want to commit to it.” Long-term contracts, therefore, remain a favoured option for the very best office buildings, which are in high demand.
Young people in particular want to be in an office environment. Steve Warnham, senior content manager at Totaljobs group has said “This young workforce is really ambitious. They want to improve their skills, build their experience and to learn from their peers and mentors. And there is a recognition that by returning to the office, they can advance in their careers more quickly”.
Why Invest in Commercial Office Space Now?
Despite a surge in remote working, data from Rightmove and property intelligence supplier Estates Gazette shows that demand for office space remains higher than pre-pandemic levels – with interest in leasing office space in the first four months of 2023 recorded as 9% above 2019 levels.
Whilst some of the larger blue-chip firms have downsized their space, mid-cap and smaller firms’ occupational demand (c.3-7,000 sqft) has substantially risen. Savills reported that despite uncertainty in the wider economy at the end of 2022, the performance of the regional office market was strong, with Q4 take-up 3 per cent above the five-year average.
In the same article Savills also cites a continued migration of employees back to offices for putting increasing pressure on businesses to deliver the very best employee-focussed workspace. As a result, the need for wellness space has never been greater and, when considered alongside the requirements to meet sustainability objectives, this points to an ever-growing demand for ‘super prime’ office space.
Why Invest in Commercial Office Space Now?
Energy Standards introduced by the Government in 2019 enforce that all commercial properties require a minimum EPC rating of B by 2030 as part of the U.K.’s net-zero policy by 2050. According to Carter Jonas, almost 92% of UK office spaces currently have an EPC rating of C or below and would therefore not satisfy the 2030 requirement.
Ezra Nahome the CEO of Lambeth Smith Hampton in his UK investment bulletin Q2 2023 stated “Pressure on lenders and borrowers alike is building, which should translate into a wave of buying opportunity later in the year and into 2024. Underlining resilient demand for secure and best in class office assets, Q2 saw several assets change hands at notably keen yields. Key examples included CBRE IM’s £73m purchase of Halo, Bristol (NIY 5.61%). This together with a number of other investments shows that the right kind of office is still very attractive and achieving yield which hover around today’s base rate." “We agree entirely with Ezra’s comments and believe this is going to be a once in a decade transaction to buy quality, distressed commercial investments” Melanie Omirou Executive Group Managing Director, Acorn Property Group
03 Why Acorn?
Why Acorn? With regional offices throughout the target areas of the South West of England, London and the M4 corridor, Acorn is perfectly positioned to be able to make the most of these opportunities. As a property developer and regeneration specialist with nearly 30 years’ experience, Acorn’s construction and development management team has the ability to respond quickly to changes in market demands and economic conditions. Acorn can directly undertake the refurbishment and M&E improvements required, which to date is seen as too management intensive and “high risk” by institutional investors and funds who would rather sell assets at a discount. Acorn’s team can proactively asset manage, obtain necessary planning permissions quickly, and renovate and repurpose assets with relative ease, providing a competitive advantage in this space.
Acorn’s acquisitions and refurbishments follow current office market trends and requirements
• Open-plan offices, with breakout space inside the demise • Smaller office suites up to 7,000 sqft, which create most activity in the market
• Flexible office spaces which can encompass a range of options, including CAT A (fitted), CAT A+ (fitted to tenant requirements) and hybrid spaces, are desired, accommodating the diverse needs and budgets of different companies and catering to the requirements of SMEs by offering adaptability for growth or contraction.
Acorn’s acquisitions and refurbishments follow current office market trends and requirements
• Inclusion of Cat A+ office space, providing asset owners the ability to attract a much wider audience, those who would otherwise be restricted to only look at coworking options. It enables landlords to become cash generative quicker as they can fill vacancies faster by offering space that suits their tenants' needs. Consequently, tenants will pay a premium for what they need if it has flexibility and without the premiums attached to per desk pricing. • Flight to Quality - creating an office environment that both employers and employees take pride in, encouraging workers to return to the office.
• Better connectivity, seamless experiences, and enhanced productivity. To remain competitive, landlords must adapt their offerings to meet these evolving demands and retain tenants.
04 The Energy Efficient Workplace – and why it's dividing the market
Energy Efficient Offices From 1 April 2023 it became unlawful to continue to let a commercial property with an F or G EPC rating, even if the lease was granted prior to the MEES Regulations coming into force in 2018. By 2027, the EPC standard is set to become a C and by 2030, a B – working towards the UK net zero strategy by 2050. From 1 April 2023 landlords face being prohibited from granting new leases and continuing to let out properties.
“In 2021 we saw more than 90 percent of leasing activity being for the best quality office accommodation in some locations. This is clearly a sign that tenants are looking for prime space with good ESG credentials. The supply of such space is limited across the UK, with only around 10 percent of office buildings having an EPC rating of B or above. This should mean that rental pressure will remain upwards on high quality offices, and thus justify the spend on bringing secondary stock up the EPC ladder in most major office markets.” Mat Oakley Head of Commercial Research at Savills
Energy Efficient Offices Acorn provides energy-efficient and environmentally friendly office spaces, refurbished to EPC B or above, in an era when environmental concerns and rising costs are prominent.
Higher ESG credentials and higher EPC ratings create a range of benefits to both Landlord and tenants • Higher demand from ESG led tenants • High potential for rental growth
• Lower service charge costs “…building a property with a high energy performance rating can provide several advantages such as cost savings, improved comfort, environmental protection, increased market value and compliance with the building code regulations. It is an investment that will pay off in the long-term.” Fox Davidson
• Lower maintenance costs
• Potential for lower finance rates on greener properties • Longer lifespan of M&E (Less replacement costs)
Energy Efficient Offices Paul Messiter, partner in the London City Office of Chartered Surveyor Gerald Eve has stated “An increasing body of evidence suggests office buildings that achieve green certifications and ratings are more attractive to occupiers, let more quickly to stronger covenants and benefit from reduced obsolescence. Our own research at Gerald Eve shows that central London office buildings with a BREEAM ‘Outstanding’ rating have rents 23% higher than the average headline rent (see graph). Similarly, buildings with an Energy Performance Certificate (EPC) ‘A’ rating have rents 17% above average headline figures”
05
Acquisition Strategy Key Criteria
Acquisition Strategy Key Criteria
Acorn Commercial is focusing on high-yielding, well located assets, with the following attributes:
● Core/Sub-core locations with a growing occupational market
● Good transport links, located near a train station or access to parking
● High Yielding (8% on Passing Rent) with opportunity for Adding Value
● Local amenity offering and good access to an array of food offerings, coffee shops, gyms, other local leisure, health and amenity offering
● High demand for CAT A + fit out – preferably not co-working
● Desirable floor plates either easy to split or c.5,000 sq ft
Acquisition Strategy Key Criteria
Acorn Commercial focus continued:
● EPC B minimum for Core Strategy, or lower EPC for Value Add / Opportunistic Strategy
● Ability to add amenity space easily without reducing NIA if possible
● Minimal Capex requirements outside M&E and refurbishment
● Good mix of tenants, averse to single tenant occupancy unless they are an undoubted covenant with a long lease
● Minimal retail unless central location with good footfall
● Potentially suitable for alternative uses such as residential, care homes, built to rent etc which underwrites the value of the land
Acquisition Strategy – 4 Key Asset Classes
Acorn has identified 4 key asset classes within the office market to target outlined below. The assets are hand-picked based on their own unique performance criteria and carefully weighted within each asset class to ensure the portfolio is continually balanced and kept within the strict risk criteria set out, minimising exposure to any one particular strategy.
Core
Value Add
Purchasing distressed and significantly undervalued medium-to-long-term sustainable incomeproducing assets, FRI leases, let at Open Market Rental Value: Under Value Purchase and Yield Arbitrage Only
Short-to-medium-term leases, FRI with caps & shortfalls, under-rented and with under 25% vacancy, refurb to CAT A+ and adding of amenity offering, potential for M&E upgrades required for EPC improvements: Under Value Purchase and Income Uplift & Yield Arbitrage
Core Plus
Opportunistic
Short-to-medium-term leases, FRI with some caps and shortfalls, slightly under-rented and with under 10% vacancy, minor refurb, potential for M&E upgrades required for EPC improvements: Under Value Purchase and Small Income Uplift & Yield Arbitrage
Short-term leases, caps and shortfalls, largely under rented and with over 25% vacancy, large capex budget for refurb to CAT A+ and adding amenity offering, M&E upgrades required for EPC improvements, external aesthetics etc: Under Value Purchase and Large Income Uplift & Yield Arbitrage
Internal Team Melanie Omirou Executive Group Managing Director
Rickard Eriksson FCCA Finance Director
Julian Hampson BA (Hons) DipArch, RIBA Group Design Director
Dane Cummings BSc (Hons) MRICS Head of Commercial Property
George Wall BA (Hons) MSc Acquisitions Manager
Caroline Wall BA (Hons) Asset Manager
External Team Acquisitions Agents
Lambert Smith Hampton, Savills, Gerald Eve
Lettings Agents
Hartnell Taylor Cook, Lambert Smith Hampton, Savills
Commercial Contractors
Parogon, Interaction
M&E Consultants
Parogon, Box Twenty
PV Specialists & Providers Immersa Property Management
Hartnell Taylor Cook
Exit Strategy
In all cases we will be led by the market conditions and economic environment at the point of exit. The primary strategy is to hold the assets for 3-5 years; this will allow Acorn the time to reposition the asset, improve asset ESG, achieve minimum EPC B, and maximise rental income and the weighted average unexpired lease term (WAULT). Assets will then either be sold or re-financed. The portfolio will be yielding a 10-15% income on total cost and as such Acorn will be in a comfortable position to refinance to a long-term commercial mortgage, repaying existing investors.
Contact
Dane Cummings BSc (Hons) MRICS Head of Commercial Property
Jason Star Agent Relationship Manager
Email: danec@acornpg.org
Email: jasons@acornpg.org
Call: 07917 838 226 / 0208 342 7637
Call: 07774 959 568 / 0208 342 7670
www.acornpropertygroup.org
www.acornpropertyinvest.com
Acorn Property Group
Acorn Property Invest