Biggest fall in property maintenance in 50 years

28 October 2009

The repair and maintenance of commercial property has seen its sharpest fall for 50 years, threatening to further undermine the value of commercial property, according to the commercial property consultancy, NB Real Estate.

The capital value of UK commercial property has already fallen about 45 percent since its peak in 2007. At the same time, expenditure on repair & maintenance has plunged by almost a quarter (22 percent) from its peak in Q4 2007, with £4.12bn, to £3.2bn in Q2 2009 (Source: ONS).
NB Real Estate explains that maintenance is generally the responsibility of the tenant but the impact of the recession has meant that maintenance work has been slipping down tenants’ list of priorities. NB Real Estate says that underinvestment in essential maintenance work can have a serious impact for landlords and could lead to large and unexpected repair bills, falls in asset values and, in some cases, legal liability where there have been breaches of health and safety legislation.
Comments Bob Cooke, Director of Building Consultancy at NB Real Estate: “The recession has already dealt two severe blows to the property investor - reduced asset values and lower yields. Now it's about to follow up with a low punch: increased dilapidation costs. With the pressure on cash flow and the continuing reluctance of banks to lend, tenants are becoming less diligent with property maintenance. The cost of neglect can be substantial for landlords, who may struggle to let dilapidated properties once leases have expired. Landlords have already suffered huge losses from the recession but the lack of maintenance could impair assets values even further. As property owners become less able to secure lending to fund remedial work due to their weaker financial position, they are forced to delay repair work even more. This could add to property damages, driving costs further upwards in a vicious circle.”
NB Real Estate says that landlords must ensure that they have appropriate strategies in place to encourage tenants to comply with their obligations and maintain property to an adequate standard. Cooke says, “The first step is to ensure that the lease contract provides appropriate protection for the property. The second is to be prepared for the possibility of things turning sour and have an action plan ready to implement.”
In the case of FRI (full repairing and insuring) leases, landlords should carefully prepare Programmed Maintenance schedules which set out accountability and tenant obligations for maintenance under the terms of their leases. To make this effective, landlords should put monitoring procedures in place and also outline the remedial activities that could be invoked.
In the case of multi-let properties the landlord will be responsible for the maintenance programme, picking up the costs for maintenance - and hopefully repair - and apportioning them out to the tenants on a pro rata basis.
However, the recession has meant that many properties are now only partially occupied, leaving the landlord liable for the cost of maintaining the empty parts of the building. Landlords can avoid this situation, by optimising the maintenance schedule - and ad hoc repairs - to coincide with periods of full occupancy.
When things do go wrong, the objective is to minimise loss by anticipating various scenarios that could come up. There are ways to mitigate losses when tenants default, especially where buildings require significant reinstatement works but landlords need to plan for such eventualities so that they are not taken by surprise. Cooke adds: “The current climate requires landlords to be ahead of the game where repair & maintenance is concerned. By implementing best practice and having the right procedures in place landlords can avoid unforeseen expensive repairs and reinstatement costs.”