Cluttons commercial experts share their views on challenges and opportunities in managing estates

14 January, 2019


The effective management of property estates, whether charitable or commercial, is a complex affair requiring integrated input from a wide range of disciplines. In this short article we highlight key issues and actions in dealing with the challenges and opportunities an estate presents from both an operational and investment perspective.

Managing estates from an occupational perspective 

Maximising operational efficiency and driving out costs are fundamental to the effective management of a portfolio of occupied accommodation. Protecting and adding value is a further key aspect for owned rather than leased properties. In dealing with the challenges and opportunities from an estate wide perspective we suggest three key questions that charities should keep under review in order to achieve maximum efficiencies and minimise cost –

  • Is the occupational estate fit for purpose?
  • Are property records sufficiently sophisticated to enable performance?
  • Where the portfolio is leased in whole or part, are lease events planned early enough?  

In answering these questions here are pointers and potential actions to consider:

Fit for purpose 

With relocation projects we find ourselves increasingly working alongside workplace consultants to help inform the brief in terms of the ideal space requirements and configuration. In most cases the import of objective specialist advice has led to significant efficiencies being achieved and this is a process we believe should be effectively extended to an estate wide review of usage and operations, whether or not linked to relocation or a wider programme of transition.

The workplace study should be tailored to meet individual needs and objectives but will typically involve the following processes:

  • A space audit of current usage referenced to storage, meeting rooms, space standards and desk utilisation.
  • Review of working practices including the potential for the introduction or intensification of agile working.
  • Support in engaging with staff to ensure they positively participate in the review process.

Our experience is that the outcome of workplace studies will provide both the objective data and ideas that enable significant efficiencies to be achieved in terms of maximising usage and minimising the accommodation footprint. The latter aspect can then translate to relocation to smaller less expensive space, or the release of surplus accommodation for sharing, letting or sale. In the context of a large portfolio the review could also include an assessment for the merits of consolidating multiple local sites in to regional hubs.

Property records

The importance of holding accurate and up to date property data should not be underestimated. Property requires strategic decisions around lease events, capital expenditure projects and acquisition/disposal programmes. 

In addition, occupier finance teams are facing more onerous reporting requirements for accounting purposes under IFRS16 with effect from January 2019 and having accurate and complete data is key to ensuring reporting requirements can be met.

Many occupiers still maintain their property records based on an excel spreadsheet or use ‘off the shelf’ data packages which are not necessarily fit for purpose without more detailed specification and design. This can often result in issues with the quality of data and lead to inefficiencies in reporting and management of the estate through inconsistent user input. 

Our experiences of migrating data to a new data environment have shown that there can be many challenges and any migration needs to be well planned and resourced. Ideally a full audit of existing data would be undertaken to ensure the data is complete, consistent and accurate. This means that any gaps in data can be identified at an early stage, prior to ‘go-live’.

Further, the database may need be linked to the finance system which makes lease payments and/or include additional property management functionality such as dashboard analytics as shown below; document storage and workflow trackers providing an overview of everything that is happening across the estate, enabling a more strategic approach.

Planning for lease events 

The mantra here is to ‘plan early’ for all lease events. Whether this is a rent review, break option or lease renewal, early engagement with the landlord is a must to scope for threats and opportunities.

With break options in particular the early establishment of the landlord’s position should be explored well in advance to evaluate the extent of which the threat of relocation can be leveraged, whether or not the accommodation in question is fit for purpose and there is no plan to implement the break.

Even at rent review there may be other lease issues that can be brought into play such as the potential financial benefit of agreeing a lease extension through to introducing greater flexibility of subletting provisions in order to accommodate the disposal of surplus space.

Managing estates from an investment perspective 

Charities rely on income from their investments to fund grant giving and for other beneficial uses. One of the challenges in managing a portfolio of investments is to ensure a robust and sustainable income stream, particularly in the current economic climate of low yields. As such, property plays an important role in fulfilling these objectives.

Cluttons Investment Management advises a number of charities on the strategic direction and long-term planning of their property investment portfolios. We recognise the importance of maximising income whilst minimising the risks associated with achieving this aim.

Protecting income

Limiting rental voids is key. We take a pro-active, ‘front foot’ approach to occupier liaison and to developing close relationships with the tenants across our clients’ portfolios. This is crucial when approaching critical lease dates such as rent reviews, break options and expiries. Early engagement with the tenants in the portfolio increases the chances of securing future income and reduces the risk of losing it.

Each lease event is also an opportunity to add value by growing income through rental increases. At rent review, typically every five years, this might be from a fixed rental increase written into the lease, a rent linked to the growth of an index (such as the RPI or CPI) or by successfully arguing that the rent is below the prevailing market tone.

Alongside this, maintaining a rigorous approach to individual stock selection within the portfolio will ensure that lost income is more easily replaced. Each asset in the portfolio should demonstrate the core fundamentals of location, building quality and income security. In the event of a vacancy, the period of rental void is significantly reduced with a high quality, well located building where there is plenty of occupier demand.

Diversifying the income across tenant type, property sector and geographical region ensures that risk to a portfolio’s income profile is further minimised. Maintaining a spread of lease expiry and tenant break option dates across the portfolio avoids a ‘bunching’ of lease events in any one year, and therefore removes the chances of a sudden reduction in income.

Finally, we regularly review the quality and security of income in the portfolio to ensure that the tenants remain financially robust and capable of meeting the rent demands. Persistent late paying or a request to pay more frequently is a sign of potential tenant default.

Achieving superior total returns

Whilst safe-guarding portfolio income is paramount, so too is protecting and enhancing capital through opportunistic asset management. This can the take the form of physical improvements to the building or legal improvements to the lease or tenure, for example.

Prudent stock selection, active asset management and maintaining a defensive, high quality income stream form an important part of a Cluttons Investment Management strategy to maximise risk adjusted total returns whilst minimising portfolio volatility.

Challenges and opportunities in managing estates, article for the Charity Finance Yearbook 2019.