Telecoms dominate real estate planning

Copyright: David Lawson - Property Week, Sept 2000

It is becoming almost mandatory to speak American nowadays.  REITs are part of the vocabulary despite the fact that we are unlikely to see a real estate investment trust  set up in the UK. US investors are morphing multi-let offices into  MTUs (multiple tenant units) and  shopping centres into malls.  Even the fusty old Stock Exchange has dropped ‘property’ in favour of ‘real estate’ for its key share listings and index.

  One new term will cause more than ripple of chauvinistic ire if it wings across the Atlantic, however. The US industry is in turmoil over accusations of  ‘lease-slamming’.  Landlords are locked in a battle with telecom companies over access to their tenants. In normal times, this might be dismissed as just another obscure legal squabble, but these are not normal times.

   Five years ago only a handful of businesses used the Internet. Latest estimates show more than 85% are connected, and in another five years it will be virtually  universal. In the space of two rent reviews, many occupiers will have fundamentally changed the way they do business. Landlords took a while to catch on, seeing no obvious way they would be affected by the revolution apart from letting space to dotcoms. Suddenly they are being caught up in some fundamental changes.

   The e-commerce boom was born on ordinary phone wires. As the flow of data rises exponentially, however, new high-speed cables are required – and  that does involve landlords. US investors – as ever a couple of years ahead of the UK -  realised they could make money in two new ways: charge telecom companies to run services into their buildings and look forward to higher rents from the upgraded space.

  Making money is not that simple, however, and the US experience is throwing up lessons that could be valuable to UK landlords now negotiating to wire up their buildings.  Occupiers may not want to play by the landlords’ rules.

 Americans are great complainers, as  anyone who has sat next to one with a dirty fork in a restaurant will know. But this is more than matched by an obsession with choice. A  revealing set of findings by the US landlords’ body BOMA (Building Owners and Managers Association) shows they don’t want to be tied to one set of wires coming into the place; they want to choose from several  – or at choose least which services to run over them. They also have no intention of paying higher rents for the privilege of  using what they see as the equivalent of utilities like electricity or water.

 ‘Tenants view the building owner as facilitating access to telecommunications services, not as a provider of such services,’ says the BOMA study Critical Connections.

 This is not some  obscure straw poll that can be ignored outside Little Rock and Tuscaloosa. It draws on firms in more than 2,000 buildings totalling almost 400m sq ft including many outside the US. More than half of these already have access to three or more telecom service providers and some have as many as 15, which should tell  newcomers something.

  Telecom providers are keen to take up the challenge but have accused many landlords of  ‘lease slamming’ – a term dreamed up for tenants forced to use a preferred supplier. This is usually one of the established ‘baby Bells’ – regional equivalents of BT. The battle has been taken as high as the  powerful Federal Communications Commission (FCC) – the US equivalent of Oftel – and could  erupt in Congress after the little matter of Presidential elections are out of the way.

. Landlords  stand accused of stifling development of e-commerce and face demands that they allow ‘reasonable’ access to any service wishing to wire a building. This has rattled investors enough to claim a violation of constitutional property rights.

  This will strike a chord in the UK, where a different sort of battle is going on between landlords and mobile phone companies over rooftop aerials. Access rights are not being demanded but landlords are complaining that they are not getting a big enough slice of the profits. If they try to compensate by tying tenants into land line services from which they gain commission, they could be fighting an two fronts.

  There are signs that leading players have learned from  past mistakes, however. ‘People are regretting in hindsight the exclusivity agreements signed in the US,’ says Martin Moore, managing director of Prudential Property Managers, which is part of one consortium of top landlords seeking a partner to wire buildings across the UK.

The partnership will not restrict access to a designated service.

  Gordon Smith, chief executive of Centric Telecom, part of a rival consortium, also insists that he would be comfortable with other cables coming into the buildings he is wiring. Tenants will also get a choice of what services they take from those wires.

  But there are plenty of other players likely to crowd into this lucrative market – as the confusing host of special offers for voice services has shown. And a prime target will be smaller landlords and tenants without specialist knowledge of IT. They  will need strong willpower to resist selling tenants’ rights.

SECOND SECTION

 Spectacular figures are being thrown around about the potential for wiring up tenants for the e-commerce revolution. Many  should be taken with a whole sack of salt.

   True, the network of  phone wires needs upgrading to handle online business. Also true is that landlords will be able to make money by taking commission from suppliers – a vital factor when the City is so disenchanted with earnings. But there are lots of caveats.

  Most modern offices already have wiring capable of handling this new burden. Those with large tenants will also have sorted out their needs.  Smaller businesses in multi-let buildings are the prime target, as they will have neither the expertise nor capacity to act alone. That writes off a substantial proportion of institutional property, which leans towards large single-tenant holdings.   

  Figures extrapolated from the US of billions of pounds worth of  new business probably don’t give the right picture for the UK, according to Martin Moore, MD of Prudential Portfolio Managers and a member of one leading consortium wiring up property. ‘They have bigger buildings which are more likely to be multi-let,’ he says.

  Commission from Internet suppliers will be useful but rents are unlikely to boom. ‘Everyone will soon have similar access, so I don’t see a two-tier market developing,’ says Bruce Gallie, a former Danbuild executive brought in to run Unicorn Communications as a supplier to smaller buildings.

   But that still leaves a huge potential market – a potential queue of suppliers banging on landlords’ doors. Some of the top players have already made their moves, however. Nine property companies and institutions including Arlington, Delancey and MEPC are finalising a partnership with Centric Telecom, which is wiring its first building this month. Providence Equity Partners and Goldman Sachs are providing more than £75m to back the rollout.

 Centric chief executive Gordon Smith says first-entry to this market is vital. ‘Others are talking: we are wiring,’ he says. Centric will not be demanding exclusive access to buildings, relying on quality of service. It also points out that only around 25-35% of the 50m sq ft owned or managed by the partners is suitable.

  Another consortium advised by Morgan Stanley includes major players like the Prudential, British Land, Legal & General, Norwich Union and Canary Wharf. They have taken a different approach, banding together before going out to tender for a supplier. They are also mainly UK-based. The Goldman Sachs consortium has a European spread through the bank’s own Whitehall Fund, Pelham Partners and Security Capital subsidiaries like Akeler.   

  Individual suppliers are also making inroads. Unicorn has signed up 20 buildings in London and  has a been asked to survey 10 times that many across the UK.  A pack of  cable and Internet service providers is just starting to build up steam, and everyone is waiting to see if the big US players will move in. These are really big:  Teligent boasts 1 billion sq ft of  access rights, Onsite Access just under 500m sq ft and Cypress more than 250m sq ft. And  they have hardly started sweep through a market  in which revenue will quadruple to $2 billion over the next four years, according to research group Cahers.

  Fitting fibre optics and switch rooms is not cheap. But landlords are being offered these ‘fat pipes’ not just for free but with a slice of equity or percentage of  income from tenants. Operators like Centric are betting they can sell services ranging from voice and data transmission to web and application .

 ‘Our technology can fit into the corner of a cupboard,’ says Gallie. Unicorn is using  a supercharged version of the  Digital Subscriber Line (DSL) technique which BT is enabling across main UK cities over the next couple of years. Data will flow at speeds up to 2Mb/sec compared with today’s squeaky modems, which can struggle to reach a fraction of that.