How to Avoid the Top Ten Mistakes Made by Tenants
We are often asked by our clients, particularly those whose primary focus is not real estate, what the common pitfalls are that they should try and avoid. The below are those that we believe are the most common:
1. Running out time: Beginning the negotiation for a renewal or a relocation too late
This is the biggest mistake we see corporates make. In simplest terms, if you start speaking to your landlord about renewing your lease a couple of months before the lease expires, he knows you do not have time to move out. They are, therefore, unlikely to offer you an attractive rent for you to stay and you will be forced to accept whatever they put on the table.
2. Not considering business goals before implementing real estate strategy
Ultimately the space you lease is there to service the company do whatever it is that they do, be that sales, R&D, tech support, manufacturing etc. Before making a real estate decision about whether to renew or relocate it is crucial, therefore, to understand your business goals. Getting a seat in the board room can be tricky, but if not possible, be sure to speak to the end users that occupy the space and ask them what their goals are. If they need to increase sales, would it help to locate your office closer to their target customers? If they are concerned about staff retention, would it help to modernise the office to attract millennials or relocate to be closer to amenities or public transport?
3. Only considering the financial impact
It’s important to understand the cost of a particular option, but the cheapest does not always mean the best for you and your business. Savings from being in a cheaper building can be quickly eliminated if your operations are negatively impacted by being in that location.
4. Too many cooks!
A real estate decision of whether you should stay or move will impact all staff, even if only because of the change in commute time. Clearly it makes sense to get opinions on what is important to the various business lines and stakeholders that will occupy the office. However, once the key selection criteria have been determined, it is important to identify a project leader. This person will have overall ownership of the stay vs. go decision and will make the final recommendation to corporate for their approvals. Having too many cooks involved in the final decision will likely lead to delays and can derail the transaction.
5. Not considering future growth needs
Be sure to factor in anticipated head count growth and potential changes to the business’ needs during the lease term. By obtaining lease terms which will allow the company to expand, downsize (or even relocate within a landlord’s portfolio) as circumstances dictate, businesses can avoid the unnecessary headaches, loss of business and costs associated with having to make a reactive decision at some point in the future.
6. Not clearly understanding space metrics
Across the APAC region from market to market and sometimes from landlord to landlord, space is measured in different ways, this does not just mean different units (sq ft. / sq m / pyung / tsubo / ping etc.). In Korea, the space quoted by the landlord is notoriously inefficient because the landlord includes many items in the space calculation that are not normally included in other markets (such as car parking). It is essential, therefore, to know exactly how much useable space you are getting.
7. Not “pre-selling” the plan internally
Multinational firms often have very long, drawn out corporate approval processes which may involve many layers of approvers. Many landlords in Asia will not hold a space while waiting for the formal approval from HQ to sign a lease, so we often see tenants losing their preferred option to another company who is able to move faster. To mitigate this, we recommend the project leader is clear on the corporate approval process and “pre-sells” the project internally to the key decision makers at regular intervals during the process. This gives them the opportunity to ask any clarifying questions before the end of the transaction and ensures that obtaining their approval at the appropriate time is quick and just a formality.
8. Relying on the landlord’s word
Too many times we see negotiations carry on in good faith with certain issues being agreed to verbally. Either through an oversight, lack of time or purely because it is assumed the landlord’s word is good, items are not incorporated into the lease. Even if the landlord’s word is good, people move on from one company to the next and memories fade. Ultimately, if it matters to you, get it in writing.
9. Accepting that clauses are non-negotiable because they are “standard”.
This is what landlords might tell you, however, there’s really no such thing as a standard lease. Leases are negotiable, clause by clause, just make sure that you negotiate what you want before anything is binding or before you run out of time and have no leverage.
10. Not understanding the elements of value and design
Even though two options may appear to be comparable on an apples to apples basis, normally there will be a reason why an option is cheaper than another. Amongst other things be sure to ask questions about location, accessibility, specifications, facilities, design, management, environmental factors, sustainability, wellness, certifications, ownership and tenant mix. All of these can drive up or hold back rental rates.
This article was originally published in our office leasing guide. You can download it for free here. It contains details on Seoul-specific market practices as well as the typical steps in a leasing transaction. Alternatively, please contact me directly if I can provide any assistance with your real estate needs in Korea.