The urgent need to review charities’ property portfolios
As Covid-19 continues its march towards 1m deaths worldwide, the impact on the charity sector has, as you well know, been crippling.
You know your own position well enough. However, it might be worth noting that, according to the Institute of Fundraising, almost 80% of charities surveyed claimed that Covid-19 is already affecting their finances this financial year; almost 60% said they had already, or were currently, accessing their reserves during the pandemic; 45% of charities working overseas will have to close this year without additional funding.
This is against a backdrop of increased demand for most charities’ services during the pandemic.
Despite the size of their reserves, charities are considering/implementing strategies such as postponement of programmes/projects; evolution – new ways to deliver their services; reduced levels of service and assistance; while in a handful of cases, the charities are no longer able to operate.
Creating a fine balance between agreed strategies and the introduction of remedial tactics is critical so, if your fundraising is impacted, what are your options? Cost management has obviously come under far greater scrutiny and true furloughing has helped, but the reality is that your property portfolio, which traditionally accounts for over 20% of a charity’s outgoings, must come under greater focus.
A number of charities have adopted strategies which can be grouped into broad categories. Whilst it is appreciated that you might already be implementing one, or all of the following, it might help you consider what some of your options are.
STRATEGIC REVIEW OF YOUR PORTFOLIO. This is a fairly common situation: over the course of several years, a charity might have acquired a number of freehold and leasehold properties, in various locations. The adoption of technology and changes in its operational model most likely will have led to under-utilisation of a couple of sites and overcrowding in others.
So it would only be after conducting a strategic review of the whole estate that there could be the required rationalisation of the portfolio, disposal of under-utilised assets (which would generate revenue) and improvement of operational efficiency.
When was the last time you reviewed your portfolio – is now not the opportune moment to do so?
OCCUPATIONAL REVIEW AND PLANNING. The combination of physical distancing at work and some/all employees working from home has led to every single organisation (public and private) to think long and hard about what its “real” occupational requirements are (in terms of space) and how it intends. Charities will be included in this.
Thus a charity considering a potential hybrid occupancy plan will need it to reflect its business model and modus operandi. And it will involve a combination of desks (probably unassigned, to allow for “hot desking, break out/collaboration zones, meeting rooms for more formal (and confidential) gatherings, and social areas – such as kitchen/eating.
Maybe you anticipate a period of contraction or expansion, either way involving downsizing of premises and/or introducing more working from home (WFH) protocols. Therefore, your starting point must be “how will we use the space?”
REDUCE/MANAGE COSTS. Sometimes costs such as service and maintenance charges slip through unnoticed or unchallenged.
Reviewing them, challenging them, and agreeing fair and equitable costs can be time consuming and will require a forensic review of occupational lease obligations and costs data in order to understand what is, and is not, permissible for recovery. This is usually why many occupiers fail to challenge them.
Consequently, the appointment of a service charge accounting specialist could well prove to be a smart but small investment, and a very wise and profitable move. (Usually around a £2,000 consultancy fee plus a percentage of the savings.)
Another area worthy of interrogation is utility costs - when was the last time you reviewed them and sought a cheaper provider?
Borrowing against collateral
SWEATING YOUR ASSETS. If you must borrow to supplement your revenue generation, you might consider using your property portfolio as collateral.
Borrowing against collateral means you are more likely to get a loan, and you will probably get a better rate.
But what is your estate really worth and is its value maximised for this purpose? To ascertain this, you definitely need a specialist with a deep understanding of local property values and national market trends.
True, the lender might appoint their own valuer to advise them but being armed with your own independent data puts you in a better negotiating position (and you will appear more professional i.e. a safer bet), if you know the true value of your property portfolio at the outset. Again, a wise investment which will pay dividends.
STRUCTURAL CHANGE. Let’s go back to the situation of a charity which over a period of time has assembled a portfolio of properties that has helped it meet its mission goals. The portfolio would comprise both freehold and leasehold properties. Some properties may be part occupied by the charity, others may have a significant number let to third parties and some may lay empty.
In these circumstances, there will need to be a holistic review of the portfolio and ideas on how to optimise the use of it – it could even lead to the sale of the charity’s headquarters.
Knowing which assets are performing well and which assets are surplus to requirements - and therefore exposing the charity to unnecessary costs, as well as risks and liabilities – will be critical to help it develop strategies which meet its financial, occupational and efficiency ambitions.
There is a caveat: it should go without saying that any asset strategy which requires acquisitions and/or disposals and/or letting of a charity’s property interests must comply with the Charities Act. Failure to do so can have significant consequences for the charity and its trustees.
Whilst every property asset/portfolio strategy must focus on maximising returns for the charity, it must also ensure that all commercial, financial and strategic risks are identified and cost reduction tactics considered, evaluated and implemented.
Let me close as I began. Covid-19 has forced all organisations, in all sectors to review and reconsider how they use their workplaces. Obviously, charities must ensure their mission goals are met; ensure employees can work safely and efficiently; ensure wastage, irrespective of where it is – whether it’s the utilisation of its workplaces, or occupational/running costs - is minimised; and efficiency is optimised.
It makes depressing reading, but a recent PwC study concluded that on average, charities are expecting an almost 25% reduction in total income for the year; charities received almost 30% less income than they had budgeted for; and almost 85% of charities reported a decrease, or a significant decrease, in their income. Against this background a rigorous examination of a charity’s use and ownership of property is essential.
As already stated, property traditionally represents around 20% of charities’ outgoings. That is why reviewing this cost line in your balance sheet is something you must do to ensure that your portfolio (irrespective of its size or complexity) is optimised and your property related costs are minimised.