Client Update: COVID 19

Since I last wrote on the 24th March, I have been in touch with many of you and MAPP’s teams have been fielding hundreds of calls with occupiers and suppliers as we respond to these quite exceptional circumstances. 

Please forgive the generic nature of this note, but as you are no doubt finding there are only just enough hours in the day to cover the ground.  Nigel and I, and indeed any of the Senior Executive Team, are always available should you wish to talk through the implications of our approach, or steer us in a different direction.   

MAPP’s Senior Executive Team and others continue to meet on a daily basis and are speaking regularly to support our response to COVID-19, and to ensure that we are engaging with your occupiers, keeping buildings and people safe and helping to preserve asset value. 

No aspect of our business has been unaffected, and in every team, a monumental effort is being made to balance business as usual with the shifting requirements of this crisis and the emergency planning needed for every stage.

There have been significant shifts since my last note.  The nature of the UK’s interpretation of lockdown has been finding its feet and we’ve taken key decisions about keeping buildings open and determining which of our staff are essential workers.  Quarter day brought its own particular set of challenges, and the positions being taken by our clients with regards to helping occupiers through cash flow difficulties are as diverse as they are.  Industry positions are starting to emerge, with retailers first off the block. Nigel, through his work with the Property Managers Forum, is driving consistency of approach where possible, and continuing to share thinking and experiences with other Property Management heads. We have an open data approach to this issue and share our thoughts here: wearemapp.

 

  1.               Keeping buildings open

Previous notes have explained why nearly all of MAPP’s buildings have been kept open.  In so doing, members of our site teams have been identified as essential workers. Representations have been made to the Government by various organisations to clarify the position around FM workers.  In its absence, MAPP has equipped site based and roving FM staff with letters of authorisation, which have received different responses by Police forces. Some have been rejected, and in conjunction with other agents, their judgement has been challenged.

  1.               Keeping buildings safe with reduced staff

Achieving statutory compliance has meant adjustments to many of our working processes as our buildings adjust to partial occupancy or reduced site teams, or by virtue of absence or furloughing have become ‘unmanned’.  Our FM teams have adjusted working procedures with dynamic risk assessment tools, return to work environment risk assessments, FM checklists, revised contractor management processes and revised fire and safe evacuation processes.  

  1.               Staff cost management

The difference in sectors is perhaps most evident here.  Some parties are suggesting budget reductions of up to 40% are achievable.  Retailers are asking for costs to be reduced to near zero. We, as with other agents, are awaiting Revo’s advice on a coordinated response to retail tenants across the board in terms of rental payments and service charge reductions.  Our Retail teams continue to press Revo and we expect to hear more next week.

Retailers are pushing hard for site teams to be furloughed, and for those on furlough to be paid the minimum.  Consequently, furloughing is starting to be pushed out more widely by property managers. There is no consistency of approach emerging yet around top up payments but the sense is that  they should all be recovered from the service charge given the overall saving. Some of MAPP’s clients are instructing that full top ups should be paid and recoverable. We are recommending that everyone that is furloughed should receive 90% of their salary up to £37,500 and 50% after that.

Generally, FM and operational staff are not being furloughed.  This is because statutory inspections and compliance are still required and FMs support the scaled-back operations.

Other sectors are pushing but not as hard.  Generally, we are finding our clients not wanting to follow suit and are focusing instead on supporting the site team, the supplier base and the property management team.

  1.               Reducing budgets

Although each site will be different, there are some common themes of areas where costs have been scaled down or removed.  MAPP’s FM teams have been given a cost reduction template of 60 areas for consideration. These generally fall into two categories – discretionary or non-essential spend which can be stopped, or measures to increase the natural reductions arising from lower occupancy.  Examples of these are shown below:

Discretionary spend and non-essential contracts have stopped.  These adjustments include:

  • Cancelling marketing, advertising and promotional activity
  • Suspending sinking fund recoveries or provisions for future expenditure
  • Withdrawing/deferring major works
  • Confining M&E/fabric maintenance confined to essential works only, in some instances scaling back of contract maintenance and PPM.
  • Window cleaning

Natural reductions are arising with occupancy-related costs.  For example, reductions in: 

  • HVAC operating times
  • Transport services to and from site 
  • Reception, front of house and customer service teams
  • Waste collections 
  • Utility consumption (where those contracts don’t have penal take or pay clauses).

To benefit from reduced energy bills, our teams are ensuring that meter readings are submitted to the suppliers reflecting the new reduced power draw. Energy prices are comparatively low at present, with some markets currently 15% down.  We are making sure that contract renewals during this period take advantage of these.

More meaningful cost reductions will only be achieved through a reduction of man hours or in staff needed. It may be impossible to achieve the reductions that we are likely to require without loss of jobs – however, where loyal service has been given for many years, we are doing everything we can to reallocate or repurpose those individuals’ roles to areas that are still needed. 

For some the decision is easy, many have childcare responsibilities, many are more comfortable not working during this time and we are trying to ensure where possible that the people working on our sites are comfortable doing so. 

There is an expectation that costs can be adjusted in ‘real time’.  The majority of service charge expenditure is incurred from supplier contracts where termination provisions are still contractually binding.  Force majeure has been mistakenly understood as a mechanism for service cessation. It is not, and instead we are exploring the angles of contract frustration.  So whilst service requirements may have fundamentally changed, the contract liabilities have not. MAPP is therefore working with its suppliers on portfolio-wide solutions to enable cost savings to be released where possible and for the benefit of savings derived from furloughed staff to be felt by the service charges. 

  1.               Decommissioning buildings

Initial conversations about switching everything off and turning it back on again when we return to work are working their way through.  MAPP’s position is that decommissioning should only be the last resort. 

Whilst it will save energy costs and allow engineers to be stood down, it has significant cost implications further down the line.  Re-commissioning plant requires specialist support, water supplies will need to be chlorinated and with contamination arising from biological activity in closed water systems left idle over summer, these costs will be considerable.  Lifts are designed for frequent, regular use. The impact on lift machinery, parts, ropes and shoes from prolonged inactivity may cost more than the energy savings. And when the engineers come back, invariably they will have been redeployed to other sites with loss of site knowledge. For complex buildings with complex systems, that’s material.

  1.               Security

From watching other countries who are ahead of us with the implications of restricted movement, there is a very real and escalating threat of increased criminal activity.  The requirement for security has been further strengthened this week by the new court directives which prevent anyone from filing proceedings at the County Court for any possession claims until 25 June at the earliest. This includes squatters and aggravated trespass. 

This will have a significant impact on security and how we manage intruders moving forward and we are looking at where we need to consider more robust security options on high risk vacant properties, out of town retail, industrial or business parks. 

We are monitoring Insurer requirements for these assets.  Previously, Insurer requirements included concrete barriers and alarm systems.  These measures are now shifting to securing fire escapes and windows with steel sheeting, additional security guarding and dog patrols.

  1.     Reduction of on-account service charge budgets

Unless specifically instructed to, we are not adjusting budgets or on-account payments.  Our occupiers need to make decisions about what they can and can’t afford based on budgets that aren’t changing month on month to temporarily fend off service charge consultants.

At this stage, none of us know how long partial occupancy will last or the consequences of it on building systems and plant.  Is it better to have a 10% saving handed back, or a 10% contingency for when we come out of this? A 10% saving isn’t going to materially prevent the painful decisions our occupiers are having to make on a daily basis.  It is however going to make the difference when those buildings come back up to full load as we’re released back out to live, shop and work as we never have before. Not only will systems be coming back into use, but they will be tested ‘in anger’ and have a higher probability of failure.  Our FM teams will shortly be working through critical spares for their sites to minimise this down time, particularly as we envisage a run on supplies with a relatively small number of manufacturers such as Otis, York etc. These spares will inevitably need to be paid for up front.

  1.               Cashflow

Positive cashflow remains vital for us to be able to keep properties safe, secure and operating. Whilst reduction in spend has a part to play, and we are actively pursuing this approach, it is essential that we continue to receive funding to allow us to pay suppliers for carrying out the key services still required.  Service charge collection payments as at day 7 are, on average, at 61% across the board, with fluctuations between sectors and portfolio types. This compares to around 81% this time last year. Interestingly on an overall basis, service charge collection has outstripped rent collection in terms of % received. While we continue to liaise with occupiers to increase the service charge income, the full impact of this will become apparent as the quarter progresses, and we will continue to have dialogue with all of our clients to ensure we remain in funds and able to operate sites.

David Clein
Managing Director