Any organisation, be it commercial or not-for-profit, needs to have a property strategy – a formal document that sets out how that entity considers its operational and, as applicable, its investment/freehold real estate.

Formulating and then implementing an effective property strategy is a crucial element of any organisation’s governance – and it is achievable with the right approach. It is an important building block of the G of ESG.

For the smallest businesses, say operating out of one location, a property strategy would set out the rationale to lease or buy property and if the former why a particular lease length was selected. For larger multinational businesses the property strategy would be materially more comprehensive, but it would, like the small business, consider the P&L and balance sheet impacts of its property interests. By way of example, lease obligations to pay rent and service charges will impact the P&L as will the interest charges on any borrowings needed to buy freehold property. Whilst not a cash flow item there should be prudent provisioning in the accounts for end of lease liabilities (such as reinstatement and dilapidations) and the annual writing-off of fixtures and fittings over the term of the lease or their economic life if shorter.

Whilst the above accounting policies for leasing or owning real estate are standard for an experienced bookkeeper there are decisions required for a property strategy that needs to be evaluated by an experienced Finance Director who may require some consultancy advice to supplement their own experience and skills. Once the strategy is prepared in draft it should be debated and ultimately sign-off by the Board or, as applicable, the Trustees or Governing Body.

So, let’s now consider some of the key questions for every property strategy. As a starter, does the existing property portfolio service, support and enhance the Business Plan of the organisation?

The critical point here is that the organisation first needs to have a clear Business Plan – it’s “raisin d’être”. Remarkably many businesses and charities do not have a formal plan and go by a “seat of the pants” approach. We would suggest that a Business Plan is critical and that only once there is a Business Plan can anyone assess now the various property interests service, support and enhance its delivery.

The Business Plan focuses not just on the next year or two but should set out where the Directors/Trustees believe that opportunities lie for the next 5-10 years. For commercial organisations the opportunities will be within its marketplace and for charities and not for profits it will be within the activities allowed by its charitable objectives.

The most frequent questions in the development of a property strategy are:

1. does the property portfolio suit staff requirements and is it appropriate for clients?
2. does the location and specification of the accommodation allow for the efficient operation of the business?
3. does the property portfolio support the organisation’s net zero/environmental objectives given that property has a large impact on the environment via is construction and operation?
4. given the predicted changes in the business and developments in the organisations marketplace/charitable objectives horizon is the property portfolio flexible enough to support the Business Plan over the next 5-10 years?

Focussing on a specific type of business such as a care home operator the property strategy questions are likely to move on from the above to more detailed analysis such as:

• are the homes suitable for its care purpose?
• are the homes sizes efficient for the market demand and operations?
• will staff want to work from the homes?
• how does the care homes rank in terms of its Energy Performance Certificate score?
• how are new IT services going to be built into each home? AI and more basis technological enhancements are going to materially impact care provision (i.e., robots, movement monitoring, fall alarms etc.) and does the property portfolio lend itself to retrofitting for IT upgrades? If leasehold are landlords going to consent to changes?
• how are the regulators views on care provision evolving and how do the properties suit the delivery of these emerging standards of care?

The challenge from the property strategy once agreed is to then plan and implement change so the properties best service, support and enhance the business. In the care home sector this is likely to mean closing certain operations and investing in others. There are some very conflicting trends to navigate best illustrated by a regulator – the Care Quality Commission – who is pushing for more independent living in often smaller facilities whereas the commercial drivers are the economies of scale by operating larger facilities.

In our advisory work we look for three characteristics of an operational property portfolio. Is it:

1. Fit for purpose?
2. Future proofed?
3. Financeable?

Whilst the above commentary on the care homes sector considers some elements of the fit for purpose question when advising organisations, we usually draw up an evaluation matrix through which each property interest is analysed. Having a formal rather than subjective evaluation process removes bias in the process. The evaluation review will product “buckets” of similar property that can then be processed in a similar way such as selling or repurposing via capital investment.

Striving for the future proofing of a portfolio is difficult and is never going to be 100% successful by its very nature. However, in our experience it always helps to build in flexibility to any operational estate. For instance, having some leasehold and some freehold property interests gives more opportunities to downside an estate if required. In our experience newer assets are far easier to execute a retro fit IT upgrade programme than old assets.

Finally, we always suggest that having a financeable property portfolio should be a key objective of any property strategy. This is where the experienced Finance Director comes into their own.

By financeable we mean a portfolio that is ready to be offered up as security for a loan or to be sold as part of a sale and leaseback programme. This is important as it gives boards financing flexibility.

In practical terms this means that property titles need to be reviewed and cleaned up (old entries and charges removed etc.), it means transferring freehold ownerships to new entities (so potential purchasers and lenders can mitigate Stamp Duty Land Tax, see clean accounts just of the one asset and security can be limited to specific assets.

So much can be lost if organisations do not have these crucial plans in place. Professional advisors can help by bringing industry wide experience to be table and by acting as a catalyst for necessary change. As adviser we have unfortunately seen too many organisations who by being slow to recognise or implement change in their property portfolios have had their businesses materially negatively impacted and sometime even fatally.