Securing a stable rental stream is the priority over higher rentals in uncertain financial times. Whilst tenant covenant has always been an important criteria in assessing valuations, typically landlords have chased higher rentals to increase the valuations of their assets. Currently however, we are finding lease covenant quality is becoming a larger factor than high rentals in valuation assessments.
Evidence in our recent projects indicate the spreads in capitalisation rates, due to quality of tenant and their percentage of overall committed income, are increasing by as much as 0.5%. This translates into increased valuations event when combined with lower effective rental rates.
Now is the time to assess your asset and review strategies to sure up income, valuations and finance. Consider lowering rental rates and increasing lettable area for tenants with strong covenant to fill unleased space. This will require reducing the average rental targets of the asset but will increase the WALE and rental coverage. The result, as we have seen on some of our recent projects, may increase the asset’s valuation significantly.
If you’re in need of assistance to review your asset strategy, we’re here to help.
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