By Chris Brain, CIPFA Senior Construction and Property Advisor
Local authorities are major land and property owners, with the benefit of planning and economic development powers. These have often pieced together over decades and been influenced by a variety of events. This can include war bomb damage clearances, the merger of neighbouring authorities, acquiring properties for road-widening schemes (which never took place), or donations/gifts by wealthy landowners. This has led to an incredibly mixed public estate often containing assets of historical and political significance which can be sensitive due to community attachment and involvement.
With ongoing budget cuts, local government reform and conflicting priorities it is essential for estate managers to ensure that assets are being optimised in the broadest sense. Given the diversity of a local authority’s property holdings it is fundamental to understand why we hold these assets and what their purpose actually is.
Property teams across the length and breadth of the country are under constant pressure to release the last pound from the portfolio and improve financial returns. But it is also necessary from time to time to take a step back and ask why are we holding certain property assets and how can we measure their performance more effectively. These questions become even more pertinent when managing a disparate estate which could include anything from industrial warehouses, shops, bowling greens, enterprise centres, crèches, farms and airports – the list goes on and on!
The purpose of this article is therefore to provide an overview of the asset challenge process for a local authority’s tenanted non-residential property (TNRP) portfolio, both the commercial (non-investment) and non-commercial (or community) portfolio. In unpicking this subject area we touch on a range of issues including strategic purpose, ownership/accountability and performance measurement.
The commercial portfolio
Many local authorities will hold a ‘commercial’ property portfolio which might well provide a steady year on year rental income. But this may not necessarily be the prime purpose for holding it. The types of properties we are talking about here include:
- leisure (ie cinema, gyms, restaurants)
- land banks.
As commercial estate managers hungry for the next property transaction or opportunity to release a ‘quick win’ we need to try and understand that there is an appreciable difference between assets held for solely investment purposes as opposed to a wider ‘commercial’ asset.
The following (accounting) definition helps to shed light on the issue: ‘An investment property is used solely to earn rentals or for capital appreciation or both’. On this basis an investment asset has no intended wider community, social or economic role. In reality, having regard to this narrow definition, the pure investment assets could in fact form a relatively small proportion of an authority’s estate.
So why do councils hold such properties? The reasons are varied and are often tied up with a series of historical events. However perhaps a key one relates to strategic control in a town centre or a designated regeneration area. Owning a piece of freehold (or long leasehold) within the red line boundary of a proposed redevelopment scheme gives a council a sense of control over how an area develops, over and above planning control. It can also provide a real seat at the table when negotiating financial, planning/design and phasing/timing issues of future development with private sector partners.
Retention of commercial interests also gives councils an opportunity to flex their economic well-being powers through direct intervention in supporting and stimulating activity where there is market failure and indeed, where appropriate, offering preferential lease terms in order to incentivise tenants and new businesses to locate to a particular area. In addition to town centre ownerships, another reason could relate to a council’s strategic housing delivery objectives where it is prepared to retain land to deliver an affordable led scheme rather than selling it for ‘top dollar’ to the highest bidder.
When dealing with these type of assets, a healthy degree of leadership and ownership will be needed in order to help shape the future direction and purpose of the estate. Depending on departmental and political structures, councils obviously deal with this in different ways however it is not uncommon for a reorganisation or restructure to ‘blur’ the decision making process and for an asset to effectively fall between the crack into a black hole!
More often than not asset ownership (or portfolio accountability) is likely to sit in Planning, Property/Regeneration or Economic Development. It will therefore be important to identify the right person and sensitively put the issue on the agenda in order to generate profile and hopefully a sustained interest which could lead to a greater understanding and consideration of the issues.
In order to give this asset class a clear place in the overall portfolio (together with a better understanding of its purpose) a periodic performance measurement against agreed indicators is likely to be of assistance. Depending on the property type these could take a number of forms including:
- void rates
- employment outputs
- business longevity
- growth in profits.
Clearly there is not a one size fits all approach and often a degree of professional judgement or ‘instinct’ will be needed to make sure that an over burdensome range of indicators and statistics don’t start to disguise or skew the reality of performance.
And finally, we are all aware that we are now operating in a world of increasing prudence and transparency and the matter of management and associated costs will need to be factored into the assessment equation. There will inevitably become a point in time when the costs of managing an asset simply outweigh any greater good it is achieving through holding onto it – in these circumstances the decision to dispose or transfer the asset might be the right option. But without measuring performance and cost such decisions cannot be made in an evidence based manner.
The Non-commercial portfolio
If you think the commercial portfolio can be challenging this can be nothing when compared to the non-commercial (or ‘community’) portfolio. These types of assets can sometimes fall to the bottom of the pile and over time can seem to have inherited peculiar lease arrangements or user agreements, the detail of which may have been lost over the passage of time! The type of properties we are talking about here could include:
- community centres
- sports clubs
- Scouts/Cadets halls
- other third sector leases.
In the very simplest of terms these facilities can be categorised as uses where the occupier is not seeking to make a living or a commercial return. The tenants will often be charities but may not always be so. These types of properties are immediately differentiated from the rest of the estate as their strategic purpose is likely to involve promoting a range of non-financial corporate outcomes, for example healthy lifestyle, general well-being, inclusive communities etc.
Whatever the strategic objective for any particular asset or group of assets, tour authorities should be capable of knowing why it has them and measuring performance and achievement. Given the type of uses involved here rental return or capital appreciation are not sufficient indicators of success.
Notwithstanding that these assets are generally held for community reasons there is often a significant cost attached to holding them. This is particularly the case if leases were granted at a nominal or discounted rent with internal repairing obligations. And it is not uncommon for tenants in addition to receive a council grant.
This therefore should place a greater emphasis on the justification for holding these assets together with their utilisation and ability to measure their outputs or outcomes. More often than not however, the outcomes from such assets has not been clearly defined, and is certainly rarely measured.
As an example, where would you start in measuring the potential outcomes from such an asset? As a starting point perhaps it could be things such as:
- frequency of use of the facility
- age profile, ethnicity or demographic of users of the facility
- numbers of users of the facility and which area the facility serves
- financial sustainability of the organisation concerned.
The financial sustainability measure will be of particular interest, as this underpins everything else. But it is not an outcome in itself. Through liaison with the tenant, we can gain a better understanding of the organisations’ financial position including reserves (and access to grant funding where applicable) to maintain the facility into the foreseeable future. Issues such as an organisation or club’s approach to maintenance and repair together with any future plans for investment to grow the membership base or upgrade/extend the building should all have a bearing on a council’s approach to management.
In addition, the issue of utilisation could be further enhanced through the introduction of third party users. Clearly this wouldn’t be appropriate or achievable in every instance and could be a thorny issue for some. But challenging the status quo should be a healthy sign of a mature organisation so that all possible options and ideas are explored. Arguably this goes to the heart of our role as asset managers.
What makes a ‘successful asset’ will vary from arrangement to arrangement. The important thing is to be clear what the asset is there for, what benefits are intended to derive from it, to determine measures of success, to monitor performance against objectives and to undertake a cost benefit analysis to determine whether the outcomes justified the costs.
At the end of the day these tenanted assets are always likely to form a part of a council’s estate. However we need to be aware that just because it is a property asset, the use conducted within it can be more important than the outcome of a rent review or lease renewal. Where resources are stretched and priorities seem to revolve around maintaining the bottom line it is arguably more important than ever that there is transparency around why we retain these assets and the outcomes generated from the various arrangements in place – whether they be economic or social.
As responsible estate managers or asset managers our role is to bring challenge and in the current financial climate there could be no better time to do it. We need to sometimes push our organisations to question the status quo and ask the important questions:
- Are these areas sensitive? Yes, they are.
- Are they highly political? Yes, of course.
- Could the challenge we bring be unwelcome? Yes, it could.
- Is that a reason not to do it? We would say: it's not!