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Businesses and, indeed, wider society, face a range of issues which will shapethe future success of our companies and economy – an ageing population,addressing future energy requirements, and establishing a competitive taxregime, to name but a few. Deloitte gives its perspective on five issues whichwill have a major influence and impact on the UK, and considers thechallenges, opportunities and tough choices we face.

Perspectives

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The age of commoditiesThe world economy has been through several cycles where differentsectors have predominated. Most recently, the age of telecoms andhigh-tech that ended with the dotcom crash of the early 2000s andthe age of financial services that came to an abrupt halt with theglobal financial crisis of 2008.

We are now in the age of commodities, particularly for oil, gas,metals and minerals. Whilst in many ways the markets aroundtechnology and financial services are intangible, commodities arevery tangible. They are fundamental to economic growth over thenext decade and the continuing progress of the BRIC countries,especially India and China, whose appetite for commodities isinsatiable.

This is part of a fundamental shift in the global economic balance of power. The BRIC countries and others such as Indonesia havelarge populations that are demanding an increase in their standard of living.

Securing the future growth of these countries depends on theavailability of key commodities. The demand is not just restricted to industry and manufacturing. There has also been a surge indemand for diamonds in China and gold in India.

Vast swathes of India’s population do not have access to electricityon a daily basis. Access to electricity and motor vehicles – and thussupply of oil, gas and coal – are critical for the populations of thesecountries to realise their aspirations. The most basic way of achievingthis lift in living standards is through the provision of personaltransport and all the benefits of the provision of electric power.

The changing balance of powerAt the same time, economic surpluses in these countries now give their oil and mining companies the ability to buy upstreamassets in the energy and resources sectors. As a result, Chinese and Indian corporations have been acquiring assets in markets such as Africa at an amazing rate. This marks a shift in the balanceof power away from the traditionally dominant forces in the miningand energy sectors – Western companies such as BHP Billiton, Rio Tinto, Exxon Mobil, Shell and Total – to state-owned companiesthat don’t have a high profile in the West.

These state-owned companies are also able to offer host countriesbenefits that publicly-listed companies are unable to. The advanceof Chinese companies in Africa has been coupled with large loansfrom the Chinese government to countries such as Sudan.

Perspectives

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Commodity markets have been volatile for the last few years, but demand has driven an upward trend in prices. In 2004/05, oil prices hovered around $40 per barrel. During the financial crisis,they fluctuated between $40 and $150, before eventually settling in to a new range of $70-$90. This step-change in the long term oil price is driven by the demand for commodities in emergingmarkets – the pattern is similar for coal and metals such as copperand iron ore.

This demand pressure makes the market very responsive to developments that affect supply. Strikes in South Africa and Chile have hit the copper price while the oil price is vulnerable togovernment responses to the Gulf of Mexico disaster. It is possibleto envision a return to $100 a barrel oil in 2011. Commodity priceshave always been subject to volatility, of course, but the price levelaround which they trade is now much higher.

Managing higher commodity pricesSo far, the world has coped with higher commodity prices withoutan excessive rise in inflation or restrictions on economic growth,partly because the scale and breadth of global economies is muchbigger than during previous periods of rising prices such as the oilshock of 1973. How the global economy reacts in the futuredepends partly on government policies. In India, for example, the government has spent a huge amount subsidising fuel prices, a policy that is gradually being phased out. In the UK, oil priceincreases were managed by moderating the tax take. As economiesdevelop, they become less prone to increases in the price ofindividual commodities.

The age of commodities has been reflected in structural changes inthe FTSE 100 over the last five years. The number of oil and miningstocks in the index is about double what it was five years ago asinternational energy and mining groups such as ENRC, Kazakhmys,Vedanta Resources and, most recently, Essar chose to list in London.They now make up about 32% of the index.

This means commodities companies now have a real impact on the UK economy, even if most of their operations are elsewhere.Because many pension funds and other investors with tracker fundsor exchange-traded funds have to hold these constituents in theirportfolios, many people’s pensions depend on the futureperformance of the sector.

Expanding domestic consumptionThe end of the age of commodities looks to be some way off, given the scale of development that is still needed in manyemerging markets. While the cost advantages of the emergingmarkets will be eroded over time, reducing export-led growth,domestic consumption is set to expand rapidly, maintaining demand for commodities.

The biggest challenges for the sector are regulation – such as canbe expected as a result of the Gulf of Mexico crisis – and attemptsby governments to increase the level of taxation on resources, suchas Australia’s now maligned Henry tax.

Governments have to strike a balance between taking a fair share of the economic rent for their resources and imposing a burden thatis seen as punitive. This is not easy to do and can have far-reachingconsequences. Investors have a choice of jurisdictions where theycan invest and may avoid investment in a particular country if theyfeel its tax burden is unfair.

Perspectives The age of commodities

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Energy security and access to commodities are huge issues for manyeconomies and it is for these reasons that Deloitte has invested in a strong cross-disciplinary practice in oil & gas, mining and powerover many years. Governments, markets and companies needprofessional advisers who understand the dynamics of energy andcommodity markets and the mechanisms of global energy andcommodity trading. This knowledge and these skills are afundamental part of our business.

For many years, insufficient attention has been given to energy and commodity supply issues by governments. These issues unfoldover a relatively long time frame and policymakers need to balancelong term needs against short term political considerations to getmarkets working efficiently. In the age of commodities, if we do notpress ahead with the investments in energy and commodities thatwe need, there is a significant risk that we will not have sufficientcapacity for our needs.

This is not just an issue for China, India and other rapidly growingeconomies. It is equally a significant issue for the UK – developingpolicy and market mechanisms which secure our energy future,especially in terms of power generation, in a manner which is bothaffordable and sustainable. Policymakers have much to address withenergy suppliers. We intend to continue to play a key role inshaping this future.

The end of the age of commodities looks to be some way off, given the scale of development that is still needed in many emerging markets.

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New times, new tax policies?As we look back over Gordon Brown’s reign over UK tax policy, we may reflect that, whilst there were many changes to our taxsystem, much of the basic framework remains.

Thirteen years of New Labour ended with the highest personal taxrate since the 1980s (but the lowest basic rate) and the highest everlevels of national insurance contributions. Capital gains tax (CGT)was cut from 40% to 10% for business assets – before the flat 18%rate arrived in 2008. New environmental taxes were introduced,although all but landfill tax are fairly trivial and the proportion of tax raised from environmental measures actually fell. The mostsignificant changes, though, were to corporation tax. The abolitionof ACT (advance corporation tax) removed the imperative for groups to have sufficient taxable income in the UK to support theirdividend. The rate reduction from 33% to 28% was financed bytaking tax payments earlier, together with cuts in capital allowancesand the abolition of buildings allowances. 2009 saw an overseasdividends exemption which added to the substantial shareholdingsexemption, whereby trading groups could sell trading companiesfree of tax. However, the corporation tax yield grew by 4.5%annually – well in excess of GDP growth.

Yet some will regard this period as one when tax planning boomed. Multinationals pushed ahead with regional centralisationof activities, usually involving intellectual property, and discoveredalpine meadows and Dutch flood plains offered substantially lowertax rates. Overseas financing activities grew in scale, liberated by the Treasury’s failure to comprehend the protection ACT had offered to the UK tax base. Both these types of planning moved significantincome out of the UK. The Treasury response was to reallocateforeign income to the UK through the CFC (controlled foreigncompanies) regime and the complex ‘debt cap’ rules, designed to limit upstream loans into the UK. Over twenty groups relocatedoutside the UK to escape the crackdown and most quotedcompanies now keep inversion under review. The UK had gained an international reputation for an uncompetitive corporation taxregime, fuelled by uncertainty.

A new era for HMRCThe growth of debt financing and complex financial instrumentsprovided further opportunities for reducing tax, as tax rules failed to adapt to IFRS accounting. Loss schemes grew in significance(although the courts ruled against most schemes). The Government’sresponse was targeted and effective. The threat of retrospectivelegislation reduced significantly employment schemes and the 2004 Tax Disclosure regime gave HMRC early warning ofundesirable planning. HMRC started to emerge from its initialmerger trauma with a much greater focus on customer service andbetter appreciation of risk. For many large companies the servicestandards have improved massively, although there are still issues to face with many individuals and small businesses, as costreduction has taken the focus away from local service to largeclusters and call centres.

Perspectives

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The new Coalition Government faces many challenges if it is topromote growth, whilst still raise tax. It has met the first challengewell, by opening the doors to Treasury and HMRC tax forecasts.Suddenly we can see much more about the economic impact of taxes.

Keeping corporates in the UK Corporate tax reform is due to start autumn 2010 with a majordiscussion document. The focus is on reducing tax and making the UK a much more attractive place to do business. The newChancellor has declared he wants companies to come to the UK,not leave. Reduced rates tell part of the story, but we should look at a low-tax regime for intellectual property. All the economicevidence shows that intellectual property is extremely mobile andthat groups with high levels of IP have lower than average tax rates.It is an area where corporate tax is hard to levy and the focus needsto be on the wider economic benefits, from employment andservices. The Chancellor has also signalled that a curtailed CFCregime is needed – and he is clearly correct. Companies leave theUK if the CFC regime is burdensome. At the same time, we need toconsider whether it is a great idea to let some companies reducetheir UK operating profits to zero with debt interest.

Perspectives New times, new tax policies?

The focus is on reducing tax and making the UK a much more attractive place to do business.

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Will this be sufficient to attract multinationals to the UK and UKmultinationals to expand their activities here? No doubt the mantrathat ‘tax isn’t the tail that wags the dog’ will be used – but all thosemultinationals in Switzerland make it very clear that tax really didtake them there. Economist John Kay noted in a Chartered Instituteof Taxation presidential address that it is increasingly difficult to levycorporate tax on multinationals. What could be the alternatives toour current system?

We should quickly reject the EU idea of a CCCTB (CommonConsolidated Corporate tax base), where profits across the EU are added together and then allocated between nation states byapplying factors based on employment, property and destinationsales. Nations need to control their own tax base and the idea ofceding control to the Commission is a non-starter for most. It alsoignores the large and growing world outside the EU that will notjoin in. However, using destination sales to help determinecorporate profits is a good idea. The UK is a large economy andmost multinationals will wish to sell their goods and services to UK consumers and businesses. Destination sales could be a way of allocating profits to the UK, on which a corporate tax could be levied.

Responding to new challengesAnother area to look at is carbon taxation. Many argue that if we are to reduce our CO2 production, we need to price carbonproperly – which requires taxation. The EU’s permit system willeventually impose costs on businesses that need to buy additionalpermits. Perhaps a proper tax would be a better idea and one which could raise significant revenue.

We also need to consider the other end of the spectrum – self-employed individuals who provide their services throughcompanies. The problem is that a 20% rate of corporation tax,deemed credits for dividends and a CGT rate lower than the mainhigher rate of income tax, conspire to push many into usingcompanies. There is no economic logic in taxing people doing thesame thing in a different way, according to legal form. There are arange of options to consider, including abolishing the deemed taxcredit on dividends or making closely held companies ‘transparent’for tax purposes, so that the owners are taxed directly on thecompany’s income.

These changes will all need to be accompanied by reducedcollection costs, which imply even greater focus on deduction atsource, aided by smarter IT systems. More central payers, such asbanks and employers and perhaps even large customers, couldaccess data held on HMRC databases to withhold the appropriateamount of tax and provide information.

This brings us back to the need for greater openness about our tax system. People need to understand more about the tax-payingpopulation, individuals and businesses, so as to explore andunderstand the best system to generate the revenue we need,whilst supporting employment and economic growth.

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Education and skillsin the 21st centuryWith concerns about Britain slipping down the competitivenessleague tables, the focus is on our education system and the skills andemployment abilities we are giving the next generation of workers.

How can the UK provide its workforce with the skills they need forthe future? What roles can companies play? How can they workwith government? What are employers looking for and what docompanies need from its education system?

These are important issues that transcend political debates abouthow much education costs and can best be provided.

We approach this as an employer of over 12,000 people, one ofBritain’s largest graduate recruiters with an intake of 1,100 a year,an adviser to large corporate and government clients and an activeparticipant in our communities.

We are investing £2.6 million in our flagship Employability Skills initiative, training teachers from more than 70 further educationcolleges to provide employability skills coaching alongsidevocational courses and sending more than 600 employees tovolunteer in UK schools. More than 250 of our people deliverworkshops at further education colleges each year on CV, interview and presentation skills.

All this, along with our sponsorship of Teach First, gives us insightinto Britain’s education system, the demands being placed on it forfuture employment skills and the roles that business, government,schools and colleges have to play. So what are the challenges andhow can they be addressed?

Working together to improve employability skillsClients tell us that the ability of young people to work together inteams, communicate well and be effective in their work habits isjust as important as technical proficiency and sometimes more valuable.

This is an area where much more needs to be done. The 2010 CBI Education and Skills Survey revealed that over two-thirds ofemployers want action to improve the employability skills of schoolleavers. Almost half of employers were dissatisfied with the businessand customer awareness of graduates, and a quarter unhappy withgraduates’ time management and problem solving skills.

Employability skills have been described as the ‘lubricant’ of ourincreasingly complex and interconnected workplace. The challengeis to ensure that our people are ready for the workplace, with theright attitudes and behaviour to be of value to employers and toprogress in their careers.

This needs to be led by employers, who will see the fruits of their efforts in the skills and aptitudes developed by their futureworkforces. But government and businesses also need to getbehind it. Employers need to be persuaded of the business benefits of appropriate engagement with education and students.Teachers need encouragement to help young people rise to thechallenges of developing employability skills.

Perspectives

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A role for businessThe big challenge is employer engagement. Too often, complaintsby businesses about skills shortages come across as finger-pointingand buck-passing but education providers, government andemployers need to collaborate to make employability a coreelement of every young person’s education at school, college,university and in work.

Businesses have the entrepreneurial flair and operating skills to take the lead. This year, a report commissioned by the Educationand Employer Taskforce found that 333 out of 500 young peopleinterviewed could recall the number of employers they had heardfrom at school over the preceding two years.

Some 42% said they had no contact with employers and 40%recalled fewer than four employers ever being involved in lessons.

Where there had been contact with four or more employers, youngpeople in the study were one and half times more likely to believethat they would be able to find a good job. Partnering with localschools and colleges makes good business sense and will benefitcompanies that invest in it.

At Deloitte, employability skills are crucial to the success of ourbusiness so, following extensive consultation with our clients, wedeveloped our Employability Initiative. Working with government,the education sector and our clients we developed a programme tohelp young people develop the skills, attitudes and behaviours theyneed to secure and sustain employment.

By 2012, we will have trained 800 teachers and delivered training to 40,000 young people. Engaging in a collaborative approachhelps us build connections with key stakeholders while developingthe skills of our own people through our internal volunteerprogramme to support student courses.

A role for governmentImproving employability is a challenge for government as well asbusiness. Government needs to make it easier for companies toparticipate in the education of their future employees. More needsto be done to widen access to the professions and also engage‘blue collar’ employers with training providers, schools and colleges. There should be a partnership ethos and central and localgovernment can play their part in creating it.

One college, for example, has attached itself to its local airport and is introducing its pupils to the tasks that need to be performedthere. It is a sensible and enlightened approach that could bereplicated across the country but it needs leadership, whichgovernment can provide.

PerspectivesEducation and skills in the 21st century

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Action also needs to be taken with teachers. Teachers are generallypassionate about what they do and understand the value ofemployer engagement but they do not get enough encouragementfrom government or their own schools to break down the barriersbetween education and employers.

This should start with teacher training at colleges and universities.New teachers need to adopt a different approach; one that focuses on experience of the world outside school, not just ontextbook tuition.

This should not lead to bureaucracy. Businesses, government,schools and colleges need to join up the links that will introducemany more pupils to the world of work and the skills they are going to need to participate.

A practical, joined-up approachThis kind of participation makes sense for all involved. Educationproviders see the personal growth in students, and improvements in retention and achievement rates, while employers gain youngrecruits able to hit the ground running and make a real contribution to their business.

Deloitte has an active role in the Education and EmployersTaskforce, set up in late 2009 with a vision of ensuring that everyUK school has an effective partnership with employers to provide itsyoung people with the inspiration, motivation, knowledge, skills andopportunities that they need to help them achieve their potentialand so secure the UK’s future prosperity.

It sounds a grand aim but its objectives are practical and specific:building clear, simple and effective links between education andemployers, providing all young people with first-hand knowledgethrough high-quality work-related activities and curricula and raisingyoung people’s confidence and aspirations.

The taskforce is also committed to supporting young people so they can make better-informed career choices and providingadditional support to schools operating in challengingcircumstances. We have made an excellent start but real progresswill require the engagement of all parties that have a stake inimproving this issue. Together, we can begin to solve what shouldno longer be viewed as an intractable problem.

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Pensions – new solutions to an age-old problemMost headlines about British pension provision in the last few years have contained bad news. Pension fund deficits and greaterlongevity have led to widespread closures of private sector definedbenefit schemes and their replacement by defined contributionarrangements that transfer risk from the employer to employees.

At the same time, the cost of maintaining defined benefit pensionsfor public sector workers has become a major political issue in thecontext of the public finance deficit. Underpinning the problem isthe low savings rate in the UK and the startling statistic that up to30 million people are currently under-provided for in theirretirement.

The challenges are inter-linked. How does the private sector adapt and manage its legacy and ongoing pension liabilities, whileachieving growth, and in some cases, survival? How do governmentstackle the cost of public sector pensions? How do nations encouragepeople to save for retirement?

These are serious long term issues but we believe there areopportunities for fresh thinking to provide solutions. We areproviding leadership by using our considerable experience in this area to advise on innovative and dynamic approaches.

Closing the private sector pensions deficitThe combined pension scheme deficits of Britain’s top 100companies has recently passed £100 billion and the trends thathave led to private sector provision getting materially poorer willcontinue for the foreseeable future, with increasing numbers ofcompanies withdrawing from final salary schemes.

Regulatory oversight is also likely to tighten, while the stock market downturn of the last two years and low bond yields havecompounded the situation.

The issue for private sector companies then is what they can do toclose the gaps in their pension funds, in a way that is affordable anddoes not undermine the balance sheet and profit and loss account.

We have led the way in advising on innovative means of usingcorporate assets to provide value to the pension schemes andimprove scheme funding. Our approach involves the pensionscheme acquiring a stake in a partnership backed by corporateassets, enabling it to benefit from a secure source of income. To this end, Marks & Spencer and J Sainsbury have put substantialproperty portfolios into partnership structures with their pensionschemes to collectively address over £1.5 billion of deficit funding.Whitbread and The John Lewis Partnership have also used property as collateral in similar transactions, while ITV has used a subsidiary company.

Perspectives

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We have advised on nearly all the asset backed deals announced to date and are currently acting for a large number of companiesacross a range of industry sectors to fund more than £2 billion ofUK corporate pension deficits using assets as diverse as property,brands and investments.

This is a novel and intelligent way to make a significantimprovement in the funding of pension schemes, and we believethis approach has the potential to become much more widely-usedin helping tackle the pensions crisis.

Defusing the public sector pensions timebombThe cost of maintaining current pension provision for public sector employees is on the increase, with various estimates of the unfunded debt of Britain’s public sector pensions running atover £1 trillion – more than five times the national budget deficit.

Maintaining the status quo is unaffordable, while the parlous stateof many employees in private sector pension schemes also makesmaintaining defined benefit pensions for public sector workersincreasingly politically sensitive.

The Hutton Commission is conducting an independent review into public service pension provision with a view to makingrecommendations that are sustainable, affordable and fair in thelong term. We believe that this is an opportunity for radical changein the nature and cost of future pension provision for both currentand new public sector employees.

A new system needs to reduce the rate at which the unfundedpublic sector pensions liability increases, create a more transparentand sustainable future benefit structure with broad public andpolitical support, and create a fairer comparison between public and private sector pensions. Advances in pensions administrationtechnology have created opportunities for significant cost andefficiency savings and improved governance. This could be achievedby replacing the different schemes and delivery platforms with anew single multi-employer scheme that can deliver on a sharedservices e-business platform.

The knotty issue is the continued provision of defined benefitschemes in the public sector. Because public sector pensions areunfunded, switching public sector employees to funded definedcontribution provision would increase the short term financialburden on current tax payers, since government today would haveto pay in today for future pension provision while currently payingout against historical promises.

The pressure for change is now so great that a solution must befound. Our proposals include a new pension system based ondefined employer and employee contributions into NotionalAccounts that could be targeted at an agreed benefit level andwould increase in line with wider public borrowing. One of the keyadvantages is that this would partly transfer longevity risk from thetaxpayer to the employee without the need to pre-fund.

Similar schemes have been successfully applied in Sweden, Italy and Latvia. We believe that Notional Accounts, initially for new employees, could be part of the solution to the UK’s pensions problem.

Perspectives Pensions – New solutions to an age-old problem

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Changing the savings cultureIn the long term, the sustainable solution to the pensionspredicament is to get people saving properly for their own futures,so they can share the burden with employers and the state.

The most recent statistics on UK savings make grim reading. Based on 2008 figures, 20 million people in the UK have pensionsthat are under-funded and 10 million have no private provision atall. The issue is one of affordability and action needs to be taken if Britain is to avoid a situation where the only way forward is a mandatory savings scheme akin to taxation.

It is clear that greater provision is needed for retirement, yet it is unrealistic to believe that individuals will significantly increasepension contributions on a voluntary basis, while companies arereluctant to interfere in how people run their lives.

There is an opportunity for Deloitte to help provide a meaningfulsolution. For three years we have been supporting the PersonalAccounts Delivery Authority, which has now been superceded bythe National Employees Savings Trust (NEST).

NEST is developing a new workplace pension scheme to meet theneeds of low-to-moderate earners and would automatically enrolemployees in pension schemes if they do not opt out, in contrast tothe current system which relies on staff opting in. It is hoped thatthe power of apathy can play a part in resolving this problem.

Like other elements of the pensions puzzle, finding acomprehensive solution will involve a partnership betweengovernment, companies, employees and taxpayers. As far asDeloitte is concerned, we are happy to continue to bring our skillsand experience in the UK and abroad to bear on finding a solution.

We have advised on nearly all the asset backed dealsannounced to date and arecurrently acting for a largenumber of companies across a range of industry sectors tofund more than £2 billion ofUK corporate pension deficitsusing assets as diverse asproperty, brands andinvestments.

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Property is the second highest cost for many companies afterpeople costs, yet it has traditionally not been a priority for manyboards of directors.

Its position in an unsung corner of the corporate world is about to change. Accounting changes mean that property and the way itis occupied and managed will have to become a strategic issue forboards, with far-reaching implications for owners and occupiers.

The catalyst is an International Accounting Standards Board (IASB)proposal to bring property lease liabilities onto company balancesheets, primarily to improve transparency. With the operating leasecommitments of the top 50 FTSE companies currently standing at some £100 billion, this is no minor matter. In the US, theSecurities and Exchange Commission estimates that publiccompanies will have to put some $1.3 trillion of lease liabilities on their balance sheets.

The proposals have sparked warnings that they could ‘wreak havoc’,with one forecast predicting that 25% of UK quoted companiescould see their debt burdens more than double, even though thelevel of property assets will increase by the same amount.

In addition, the raison d’être behind the way that many companieshave structured how they hold their occupational properties may no longer be relevant.

We believe the proposals present opportunities for companies tomanage their property portfolios much more effectively. Addressingthe changes in a considered and timely manner will give the bestcompanies a competitive edge.

Plan for changeIt appears highly likely that the proposals will be agreed in broadlytheir current form, with the new regime coming into force in 2013.

The IASB is guided by the principle that if there is an obligation, it should be shown on the balance sheet and the changes bringproperty in line with this.

So what will it mean? In simple terms, where leased propertypreviously did not appear on balance sheets, the proposals willrequire leased property to be recognised as an asset and the related rental obligations as a liability. The property balance sheetwill therefore become more transparent, with a new level of detailabout, for example, turnover rents and their financial implicationsavailable to external stakeholders, such as banks, rating agenciesand shareholders.

The creation of a new financial liability on the balance sheet willalso have an effect on companies’ gearing ratios, their ability tomeet bank covenants and consequently their credit ratings.

Analysts will have much more accurate numbers on which to baseforecasts for property costs and share prices could be impacted.

As well as increasing both the assets and liabilities on companybalance sheets, the proposals will cause a significant change in the cost profile of company income statements, with costs skewedtowards the early years of leases and far greater volatility in futureyears because of the frequency of recalculation.

In the long term, we believe that the accounting changes in thetreatment of property leases will transform the way manycompanies approach property strategies.

In the short term, there are major challenges for accountingprocesses and data collection. Companies will need to compileaccurate, detailed lease data, form judgments and share thisinformation across their operations and divisions.

Real estate after 2013

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Changing business modelsAmong those who will be most impacted by the changes are themajor network occupiers, such as banks (with their head offices,vast trading floors and branch networks) and retailers. There arealso implications for manufacturers, distributors and any otherbusinesses occupying meaningful amounts of space.

Property will need to become a much more strategic business issue. Forced to view property as a balance sheet liability, companieswill start to give much more consideration to how to manage andreduce it.

We estimate that at large corporations, up to 30% of work space is currently unoccupied. Eradicating that inefficiency would go a significant way to reducing balance sheet liabilities under the new regime, further reinforcing the current trends towards flexibleworking practices and remote working.

The end of sale and leaseback?The proposals are also likely to lead to a change in the trend for sale and leaseback arrangements.

Our research suggests that around a third of companies that haveperformed sale and leaseback transactions have been motivatedprimarily by being able to realise cash or reduce borrowings byremoving property assets, whilst simultaneously keeping lease rental obligations off balance sheets.

The changes will make it very difficult to keep any property liabilities off balance sheets so we would expect a fall in the number of such transactions.

Shorter and more flexible leasesHighlighting leases as liabilities also creates a natural motivation for companies to seek shorter leases in order to reduce theirbalance sheet liabilities.

This will add to the pressure we already see for shorter lease lengths and companies will also need to consider whether theywant more break clauses in property leases to give them balancesheet flexibility under the new regime.

Some of these changes may take time to affect the market butbusinesses will benefit from beginning to tackle them now.

The best-run companies will make sure that the terms of leaserenewals, when they arise, are in line with group strategy,addressing covenants with lenders now rather than at the 11th hour and making sure they are managing the risks associated with the new regime.

A call to actionSo what should companies do in this new environment?

There will undoubtedly be a need for greater foresight and long term planning in relation to property requirements and the most financially efficient ways to meet them.

Companies should begin thinking through the implications for theirfinances now. Property is a relatively slow-moving business wheremajor change takes time to implement. The new regime will likelyexpose flaws in some corporate property strategies, which could becorrected now if action is taken.

For the companies that manage it effectively, taking a proper risk-assessed view of their present and future property liabilities to plan ahead for growth at a lower cost, the transition to the new regime represents a great opportunity to capture a keycompetitive advantage.

Anyone who is still tempted to dismiss this as ‘just anotheraccounting change’ should be reminded that similar thoughts werewidely expressed before accounting changes brought companypensions on balance sheet. It is of course now widely accepted that this change forced pensions up the boardroom agenda andhastened the decline of defined benefit pension schemes.

Perspectives Real estate after 2013