Podcast: How your property strategy can help your beneficiaries in the longer-term

What are the key considerations for charities with a property portfolio? And is it ever a good idea to cash in? Charity Times spoke to experts from RSM and Cluttons to find out more.

The cost-of-living-crisis has forced many charities to re-evaluate how they are spending and investing their money. For those invested in property, the surge in prices has led trustee boards to re-consider whether their existing property strategy still meets the charity’s financial needs. But property strategies can have hugely positive impacts on financial reserves and, when implemented successfully, can help to provide security during economic uncertainty and greater support for beneficiaries in the long term.

Our head of national valuation Jonathan Rhodes and Nick Sladden, head of charities at RSM, sat down with Charity Times editor, Lauren Weymouth to discuss how the current economic climate is impacting the property market for charities and how to implement a strategy that puts beneficiaries first. You can listen to the podcast or read the article below.

Lauren: The cost-of-living crisis is having a huge impact on charities and the balance sheet is going to need to be closely monitored during this time. What blend of funds should charities currently be looking at having?
Nick: I think before we answer that question, it’s probably just worth a quick reminder on the type of funds that we see in charities. Charities are unique in that they either have unrestricted or restricted funds. Restricted funds are those held by a charity where a funder or donor has placed a limit or restriction on how the funds can be used. So, for example, in a property context, you might get a donor giving money to a charity as part of a fundraising campaign to purchase a new property, so that money needs to be ringfenced by the charity to do just that (purchase the property). In contrast, unrestricted funds are the other funds that can be used for any charitable purpose. So as a general principle – and it’s also applicable in the cost-of-living crisis – it’s much better to have unrestricted funds in a charity rather than restricted. It gives a charity more freedom to spend funds on different projects. But another area that charities need to consider and understand is core income streams, which is vital in a difficult economic environment. Understanding where the money is coming in can help trustees to appreciate what may be at risk. So forward planning and careful consideration is essential when property is involved.

Lauren: What impact is the current economic climate likely to have on charities with a property portfolio?
Jonathan: Since the pandemic, we’ve seen many charities re-assessing their property assets and particularly operational assets in relation to their occupational needs. What’s been identified, is that they don’t need as much property as they used to, and therefore they’ve in fact identified property as a potential surplus. Some have decided to sell, while others are still in a state of flux. The income stream which can be generated from property is unrestricted, as Nick alluded to, but a charity will now really need to factor in the costs to that income. There are so many charities, in our experience, that fall into the trap of failing to think about the costs attached to property – this applies to both freehold and leasehold properties.

Lauren: Should charities that have a surplus in property be considering selling to release extra cash?
Nick: Firstly, it’s essential that trustees and management of that charity consider their property strategy, particularly, what are the operational and the investment needs? Secondly, how does that tie into the overall financial strategy? One really shouldn’t be considered in isolation from the other.
Jonathan: Where they’ve identified a property to be surplus, the first thing they should really do is to think very carefully as to whether or not they want to sell, because if they do, they ought to be determining what will they do with the cash. Unfortunately, I’ve seen many examples whereby charities seek to sell an asset, get £5 million (an example) from that sale and then the money disappears within a period of time, whereas they could be generating an income stream from it. Having an asset base on a balance sheet puts the charity in a far stronger financial position going forward, so charities should think long and hard before selling.

Lauren: So how should charities be looking to secure an income through their properties? And what are the benefits of this as an income stream, as opposed to other forms of investment?
Jonathan: Property values can increase and decrease, but ultimately, if a charity invests in the right location in the right sector, not only will they get an income stream, but they also get a capital return on the property as an investment. Also, the income stream that can be generated from property is of an unrestricted nature, meaning it could be used to invest in other forms investment or on operating costs.
Nick: There are also other ways in which a charity can get exposure to property as a form of investment, such as property trust funds, which are specifically designed for charities to allow them to get investment exposure to the property market, without directly managing a property. One such example is the Property Income Trust for Charities (PITCH). What funds like this do is invest in hundreds of different properties across a wide geographical area and they allow charity investors to share in the risks and rewards of ownership. And hopefully there’s more rewards through the income streams.

Lauren: What makes a successful property strategy and how can it benefit beneficiaries in the
long-term?
Jonathan: It’s very important that trustees regularly review their property strategy, both in the short term and longer term. There is a holding cost to having property, whether that be operational or investment, and therefore the board should be fully aware as to what those costs are. In the current climate, there’s also an environmental and a sustainability aspect to any property that needs to be considered. For example, in the current energy crisis, there’s a need to ensure that running property is as efficient as possible. But having a strong balance sheet – which includes property as an asset – is more attractive to donors, as it shows financial strength. Having a proper property strategy benefits beneficiaries of the charity in the long-term.

Lauren: What are the financial, tax and legal considerations?
Nick: One of the key financial considerations is to recognise the impact that reporting the market value of your property can have on your accounts. The balance sheet effectively freezes the value of the property at the point it was included, whereas with a market value approach, it would get updated more regularly. If you bought a property in the 1970s, that would be a massive difference in value. So charities should explore this, because it can have a quite a dramatic impact on the way their accounts look. Secondly, budgeting is crucial to fully understand income streams and having a perspective of the future for your beneficiaries. On the tax front, most taxes can apply at various times, so professional advice is always a good idea. Every situation is unique when it comes to tax, so I can’t really give general rules, but the best I can say is do think about it and get it checked out by a professional advisor.
Jonathan: In terms of legal considerations, it’s worth considering the nature of leaseholds, which aren’t as straightforward as freehold. There can be cost implications involved when you want to exit early, so one should always think about having a leasehold as a liability and when reviewing your assets, always consider whether there are opportunities to exit should you need to. Having a leasehold asset isn’t always the liability that many believe it is.

Lauren: Finally, for charities that may have extra cash and are considering stepping into the property market, what would your recommendations be based on the current climate?
Nick: That’s a place I would like to be! But I think the first thing is to go back to the duties and principles that you have as a trustee, which is ensuring that the funds are being put to best use for beneficiaries. Charities really need to understand how that links into the overall investment strategy. Get a grasp of how long the cash is available for, what type of return is desired, what your risk appetite is and how this all links into other investments that are already held. ESG is also a key consideration. If you’re going to invest in property, how does that also fit into your wider environmental strategy?
Jonathan: I think we also ought to be aware that the current economic climate is beginning to have a detrimental impact upon property values. Therefore, as Nick alluded to, the investment strategy that a charity has must be multifaceted and property should certainly form part of that. But it must form part of a long- term strategy. I wouldn’t suggest a charity should enter into an environment of buying and selling property on a short-term basis, purely because of the costs involved or doing so. Having a balanced investment portfolio helps to diversify risk.

Lauren: The sense that I’m getting here is that just because the economic climate is volatile at the moment, it doesn’t mean that it’s not the right time for charities to consider entering the property market. But, in order to do so, they must ensure that they do their research fully to make sure whether it’s right for them. Is that something you would agree with?
Jonathan: Absolutely. I think one of my bugbears as a trustee is that too many charities who have property don’t seek to generate an income stream from it. They’re too quick and ready to want to sell and utilise the capital to do something else with it. In my opinion that’s a very short- term view, which may have unforeseen implications in future years. Charities exist for a far longer period of time and therefore trustees ought to be looking towards the long-term longevity of a charity and utilising its property assets for the benefit of the survival of that charity and securing its financial future.

For more information on Cluttons’ property consultancy services, contact Jonathan Rhodes and for more information on the services that RSM provide, visit rsmuk.com. You can find this article and podcast on www.charitytimes.com/podcasts.