The Return of Major Works Expenditure

The Return of Major Works Expenditure

Following an enforced hiatus during the pandemic, expenditure on major works maybe set to return to ‘normal’ or even higher levels in the coming years. 

The underlying day to day costs of soft/hard services look to be remaining broadly flat or with minimal increases in 2022YE.  This is being achieved mainly thanks to efficiencies found during the lockdowns. However, once major works have been added in, budgets will likely increase at least in line with Inflation and some considerably more. We’ve seen draft budgets for 2022YE up to 30% higher than last year.

No one wants to see budgets increase but delaying major works indefinitely could have longer term negative impacts on asset value and footfall.

Managing the actual cost of any major works project is also going to be a challenge – the sourcing of materials and the labour to undertake these projects has already become more difficult and more expensive.

If we accept that major works will need to be undertaken within the next couple of years, how can the owner and the occupier work together to minimise the cost impact and ensure value for money?

-Should Landlords be contributing more towards major works now? It would provide an acknowledgement that works are not only for required for maintenance, but that they also enhance the asset value, which benefits the owner.

-How should the works be funded? Reserve/sinking funds have gone out of fashion but with shorter term leases and no reserve fund provision, an occupier might be paying towards the whole cost of replacing a roof in year one of a five-year term. Forward funding is an option and the option to extend the periods of forward funding to 5 years or longer, making the costs less cyclical. Money is cheap to borrow and so interest charges should be very low or non-existent.

-Can Landlords help occupiers out with cashflow and only recover the cost of major works when the works have been invoiced, or even annually in arrears? The recurring charges such as cleaning and security can be recovered quarterly or monthly. But why hold on to occupiers money from month 1 of a budget year, if it’s not going to be spent until month 12?

-Landlords should be aware that some occupiers are prepared to be more flexible on location than ever before. There’s plenty of vacant space on the High Street and the service charge will be lower and more negotiable than in a traditional covered shopping centre.  Incentives will be available from Landlords and this is likely to include caps or exclusions on major works spend.

-Limit exposure to future major works by making sure you find out what has been identified in a Planned Preventative Maintenance report and when re-negotiating lease terms, include an absolute cap based on previous years average expenditure.

-Landlords will need to demonstrate that the works proposed are driving value by increasing the footfall and this data should be shared with the occupiers; the research is often paid for through the marketing budget.

-Works should be fully tendered or at least three quotes obtained, even for relatively low value projects. By making sure the works are necessary and the costing process is robust (Tim Parkin, Director Building and Consultancy can help with this) there is confidence that value for money is being achieved.

-Voids are widespread and if major works are required, the LL will be sharing in the cost through the void units. The higher the void rate, the more likely the costs will be competitive, or they just won’t go ahead!

Greater expenditure on major works is probably inevitable after a couple of more cautious years.  Assure have been working on and encouraging greater engagement with the major Landlord groups, to share ideas and innovations, so that this expenditure doesn’t just return, unchallenged, to pre-pandemic levels.

To find out how Assure can help drive down your occupancy costs contact us.

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