Companies failing to do their due diligence when looking to locate overseas are increasingly being hit by a variety of elephant traps, including unexpected costs, occupancy delays and ultimately damage to their corporate reputation, according to DTZ, part of UGL Services, one of the largest global property services firms.
In a globalised economy, companies are increasingly expanding their office network particularly to the emerging BRIC markets of Brazil, Russia India and China. Occupancy costs are generally much cheaper than more established European regions but companies failing to research their destinations properly are suffering from a lack of local knowledge which can in some cases impact business reputations.
James Taylor, an associate director in the Occupier Services team at DTZ, said: “Cost control and risk mitigation are two major reasons why expert knowledge is required when looking to enter a new market. In many markets such as Nigeria and the second tier cities in China, landlords and their representatives have no track record in dealing with multi-national tenants. As such, companies trying to negotiate in a way that is familiar to them will find it frustrating and time consuming and many core objectives will not be met. By understanding the local approach and with some creative thinking, a workable solution can often be reached.”
However, companies do not need to go as far as emerging economies to fall into traps. For example, in The Netherlands signing heads of terms can result in a binding lease contract. In China, leases can often be challenging for companies as they are generally based on a standard contract written in Chinese which contain limited clauses setting out landlord and tenant obligations. When things go wrong, recourse to legal action can be very complex and often the best approach is to try to reconcile differences through negotiation. As such creating and maintaining a good relationship with the landlord is critical.
DTZ is seeing increasing demand for landlord due diligence on behalf of clients, particularly for those keen to protect their reputation. For example, in markets such as Lagos and Moscow, a lack of transparency on landlord ownership means occupiers can be caught out when it is revealed that their building has been acquired using funding from sources that cannot be verified or are considered dubious.
In addition, companies should seek to avoid landlords that are politically linked. It is not uncommon for government officials to own office blocks in former USSR countries which can raise issues with many multi-nationals keen not to be associated with these regimes.
Ten common issues occupiers face across the globe include:
1. Office areas as measured in the local markets deviate from country to country and as a result, space that appears to be the same size can turn out to be up to 40% different. In addition the basis of measurement can differ – the Japanese tsubo, Taiwanese ping, Korean pyung are all valid forms of measurement and equal approximately 3.3sq metres. For like-for-like analysis it is important to establish which form of measurement is being used.
2. Operating / occupation certificates are often required and can add significant delays even after occupancy.
3. Rules governing foreign ownership are commonplace especially in the Middle East so property deals are often impacted by the larger business relationships involved.
4. Property due-diligence needs to be very detailed. Power supplies are often subject to regular downtime in some parts of the world and landlords may provide additional generator back-up at a cost per square metre of the building. In some instances out-of-hours air conditioning is also charged at an extra cost.
5. In many countries the negotiations are drawn out affairs and what may appear to have been agreed the day before will often be back on the table the next day. In China and Japan it is crucial to give “face” to the other party. If the landlord sends a senior figure to a meeting it is critical that an equally senior party be sent to negotiate. Failure to do this will be seen as a loss of “face” to the landlord and will impact discussions.
6. Bureaucracy can have many layers and needs to be carefully navigated. For this reason joint-ventures with a local partner are often used in some markets but this opens other potential areas of risk.
7. In locations such as India the usual response is “yes” to everything only for those requests to be ignored despite the original confirmation. Often it is not what is being said as opposed to what is not been said, so every answer needs to be verified, often multiple times.
8. In countries such as Qatar, service charges are normally levied as a percentage of rent, typically 10%, though landlords have a poor record of delivering property management, maintenance and services.
9. In some African countries security remains a concern so it is important that premises have adequate security and some may subscribe to a reputable third party armed response firm. Where this is the case it is important the any internal security protocols are integrated.
10. In locations such as Nigeria it is not uncommon for the landlord to expect three years rent in advance.
James Taylor added: “Companies looking to move abroad face the risk of walking into an elephant trap if they do not do their research in advance and take professional advice either on the ground or from a source with a track record of projects in the country in question.
“In many areas rules, regulations or ways of doing business are very specific to a country or region and companies need to be fully aware of all the potential consequences if the local rules of engagement are not at least understood. However, this isn’t always the case and issues which can seem quite obvious in hindsight are ignored with potentially very damaging outcomes to a company’s ability to operate or its hard earned corporate reputation is put at risk.
“Doing business in the globalised economy means in many cases an extensive network of locations is required. However, companies looking to relocate particularly to emerging markets do so at their peril if they fail to do their research properly in advance.”