Occupier Outlook: Demand for flexibility set to continue

The UK office market has seen many changes during the course of 2018, the consistent demand for flexibility is one. In a market where the future economic climate is uncertain, long term commitment seems to be going out of fashion.

Start up’s to established corporates now recognise the value in flexible office solutions, whether it is a serviced office, or flexible lease from a landlord, as these products are cap-ex free and have short term commitment which makes sense for many organisations.

We envisage this trend becoming more engrained within the market as the new International Financial Reporting Standard 16 is implemented.

International Financial Reporting 16 was published in Jan 2016 to be effective in January 2019.  The standard has been developed to modernise the reporting of leasehold liability on a company’s balance sheet. Its creation will improve the transparency of a company’s real estate expenditure. One of the main changes is that off balance sheet financing will cease to exist.

What is IFRS 16?

IFRS 16 is a new International Financial Reporting Standard effective from January 2019.

What are the changes?

The new standard means assets or liabilities of a term of more than one year or of a value of more than £3,900, will be required to feature on the balance sheet and the present value of these will need to be attributed to real estate. At present, leases are often reported under operating expenses. However, the new standard requires these to be reported as amortisation and interest.

Short term leases of less than 12 months will still be reported under operating expenses.

What does it mean for tenants?

We foresee impacts depending on the size of the firm and its stage of development as a business. For example, start-ups and younger company’s may seek shorter leases to prevent large expenditure being recorded in present value terms on their balance sheets. This view is shared by leading accountancy firm Ernst & Young, who predict that “Tenants may seek more flexible lease terms to manage the impact on their balance sheets and their financial statement ratios”.

How will it affect typical real estate strategy?

Lease length will now not only be based on market forces and business plans, but also the impact on balance sheet. Matching expansion or indeed contraction plans to lease term and potential balance sheet impacts will be key strategic considerations moving forwards.

Businesses considering sale and leasebacks will now need to take IFRS16 into account.

Lease Re-gear’s on shorter terms may increase.

To discuss the impact of IFRS 16 on your real estate strategy please contact GL Hearn’s Occupier Advisory Team.

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Tenants may seek more flexible lease terms to manage the impact on their balance sheets and their financial statement ratios

Ernst & Young