MARKET KNOW-HOW: Property Manager Wanted

Property management has long ceased to be regarded as a luxury across the globe and is now viewed as a service as inseparable and essential as consulting, design, or marketing. But the Russian capital is yet to gain an understanding of that fact.

From whatever angle it is viewed, property management belongs rather to the service sector whether it is about day-to-day maintenance of buildings or managing real estate as a paying business. It can be unpretentious or highly sophisticated.

A developed service sector is a sign of a highly developed market. Usually, the growth of the service sector does not begin until the sphere of industrial production has reached a certain stage of development.

Property management services became available in Moscow somewhat later than property development. It is also unanimously agreed that the Moscow commercial property market still has not reached saturation point and is viewed as a developing market.

Perhaps the reason is that its main participants are still focusing largely on raising investments and developing real estate while the property management issue has been put on hold.

Service Sector Participants

Today leading real estate developers are becoming aware of the importance of professional property management. Delegates at real estate conferences often complain that the market is short of professional management companies.

Such statements can be regarded as a positive sign, suggesting a growth in demand. Developers, eager to hire professional managers to operate their buildings, encounter numerous problems.

Oleg Planovoi, general director at Property Management Company that runs the Global City and Kaluzhsky shopping malls, names four obvious reasons why the property management sector is slow to develop in Moscow and across the country.

There aren’t many companies that offer such services; the quality of services is poor; most landlords are reluctant to commit their properties to someone else’s care, and the market is short of credible information on the state of affairs in the property management sector.

Yelena Saratova, head of the property management department at Noble Gibbons in association with CB Richard Ellis, agrees that the information gap does indeed impede the development of the property management market.

The foreign practice of property management falls into several industries. It is essential that one understands the crucial difference between businesses specializing solely in the day-to-day maintenance of properties, providing services such as cleaning, repairs, etc, and companies who operate property complexes as a business that is supposed to yield profits, Yelena Saratova says.

Professional property management implies both asset management and control over financial flows. In an attempt to optimize operations real estate investors hire professional managers to run their properties, be it a shopping mall, an office center or a hotel. The landlord then transfers his property to the management company that takes full control over its operations and registers it in its assets.

Property management services include strategic planning to ensure the long-term preservation of property and an increase in its value, financial management and refinancing, assessment and forecasting, market positioning, optimization and redevelopment, according to the experts.

Other services rendered by management companies include financial flow management, control over internal discipline and inter-tenant relations, employees and customers, all sorts of ties with tenants ranging from their selection to creating comfortable conditions for them, and execution of tenancy agreements. Property managers carry out marketing surveys closely watching the market situation so as to ensure maximum profits.

Furthermore, property management companies are in charge of operating budget planning, maintenance of engineering systems, cleaning, development of adjacent territories, insurance, risk assessment, legal counsel, control services, the reception, catering, and parking areas.

As a rule, a full-cycle property management team comprises several managers in charge of strategic planning. Other services are provided by contractors.

In some cases, developers hire management companies at the early stages when the project is still on the drawing board, trying to provide for every eventuality, says Oleg Planovoi. In Russia, counseling is provided mostly by consulting companies, some of them running their own property management departments.

The foundations of the property management market were laid by western operators who arrived in Moscow in the early 1990s. Today they operate hundreds of thousands square meters of properties in the capital. They began by managing their own properties built in Russia. Moscow realtors followed suit by establishing management companies of their own.

The U.S.-based company Hines arrived in the Russian capital in 1991 with rich experience in development, investment and property management. Its assets exceed $13 billion. In Moscow, Hines runs 11 properties including Park Place Moscow, the Dukat Place II office center, the Gogolevsky 11 office and shopping center, Mega Mall, etc.

Sawatzky Property Management, part of a Canadian-based group of companies, was established in 1996. The company runs the recently built Krylatskiye Kholmy business park, Country Park and Baltschug Plaza.

German firm M+W Zander Holding AG operates Novinsky Passazh, Alfa Arbat Center and Citybank’s branches across the city. Real estate consulting companies Colliers International and Noble Gibbons have also established property management departments.

The leading Moscow-based management companies are Gorod Group (MDM-Bank’s head office), Forum Management (Avrora Business Park, Posolskoye Podvorye) and TsentrServis 2001 (Usadba Center).

Too Little Give, Too Much Take

Given their poor knowledge of the nature of property managers’ work, landlords are prone to make mistakes when choosing one, says Yelena Saratova. In Moscow today there is a variety of property maintenance services, cleaning firms, engineering and repair companies. Many position themselves as property managers, either intentionally or through ignorance.

Quite often such companies benefit from a landlord’s ignorance. Later it transpires that much of what the client expected is not on the list of services provided. That is why landlords are strongly advised to demand a detailed list of services provided by the company and have the price list compared with that of its competitors.

The unscrupulousness of certain companies and the ignorance of some landlords are not the only problems. Professional property managers are small in number. Oleg Smirnov, deputy managing director at Sawatzky Property Management, points out the severe shortage of professionally trained staff. There is no property management school in Russia.

Recently, several property management courses were established in Moscow. The most popular is the CPM Property Management Course under the Russian Guild of Realtors. The Certified Property Manager degree is considered prestigious among Moscow market participants. The certificate legally entitles its holder to operate on the international market.

The Russian Guild of Realtors has launched the course under an agreement with the U.S. Institute of Real Estate Management, or IREM. The course is largely theoretical, but professionals speak highly of it.

The Academy of National Economy under the Russian federal government, in association with the Ministry for Property Relations, offers the MBA program. The Russian Council of Shopping Centers holds seminars for shopping mall managers. Property management courses have also been launched by the Arsenal School of Managers and St. Petersburg’s Real Estate Property Institute.

Some Businesses Are More Rewarding

Oleg Smirnov puts the cost of commercial property management services at 5% of a base rental rate. Assuming the Class A office rental rate amounts to $625 per square meter per year, the cost of property management services will be $25 of that sum, according to Noble Gibbon’s valuation. Class A and B office tenants pay $70-100 per square meter to property managers.

Calculating returns from management makes sense proceeding from the total size of the property, which can be 20,000 square meters or 100,000 square meters. Yet, it is more profitable to take over the management of larger properties because, while management efforts are the same regardless of the property’s size, larger properties yield higher returns, holds Oleg Planovoi.

According to Planovoi’s data, the fee paid to a professional manager running a shopping mall stands at 7.5-15% of the rental rate. Shopping mall managers earn $70-160 per square meter per year. That amount covers the total cost of all the work performed on the property and salaries to employees, while the remaining sum is the fee proper.

Large returns are attainable provided the company runs at least several properties at a time. But, given landlords’ reluctance to entrust their properties to someone else’s care, a lack of demand is inevitable. Experts believe that firms involved solely in professional property management face numerous difficulties and are unlikely to make profits.

“That business cannot be profitable considering the size of the fee amounting to only 5-15% of the rental rate,” Yelena Saratova says. Increasing the cost of services would scare off landlords. Earnings could be increased by taking over larger properties, and this will depend on the supply of high quality commercial properties on the market on the whole, as well as on the effectiveness of management companies.

For the time being, property management is a low-income sector, which is yet another reason hindering the development of full-cycle professional management companies.

Cooperation Is Better

A professional management company as such is an organization of experts versed in every segment of the market. Hence, ideally, the management company is capable of overseeing a project at all the stages of its implementation.

Such a company is an integral organism that can survive on its own on the market, specializing solely in property management. But, as returns from property management services are low, such firms are rare in Moscow.

Most are involved in something else. Some began with development and then took up management of their properties. Others established management departments offering additional services and securing extra income.

“We, too, began as developers,” Oleg Smirnov says. “For property managers the easiest way is to function as part of a company.” Sawatzky Property Management belongs to Sawatzky Group of Companies. Returns from tenancies and development account for the biggest share of the group’s profits, Smirnov admits.

Most property managers present on the Moscow market are active as part of consulting companies, such as Colliers International, Noble Gibbons, development companies (Hines, Enka), construction firms or property maintenance companies who operate property management departments.

The Landlord’s Problem

Landlords still lack an understanding of the role competent property managers are able to play in boosting the returns from their properties. Proprietors consider the service to be too expensive, property managers admit. However, landlords who opt to run their properties themselves lose much more money.

In Moscow developers often act as investors and managers at the same time. It is good if the role is assumed by a professional holding that comprises a competent team of managers, as is customary in Europe or the U.S. In Russia there are almost no such groups. That is why landlords run their properties the best they can, says Oleg Planovoi.

The highest degree of trust between the landlord and the manager is achieved when the former entrusts the latter with the management of financial assets enabling him to draw up and implement the management budget, says Yelena Saratova. In fact, the manager takes over full control of the landlord’s property. The Russian market can only dream of such levels of trust.

Landlords are filled with apprehensions and prejudices. They are afraid of losing control of their properties. Oleg Planovoi says that quite often owners of large properties entrust them to their executives, who either hire property management firms at their own discretion or run the property themselves.

Cases where executives have embezzled the landlord’s funds are quite common. But some landlords are prepared for that, deciding to part with certain amounts instead of worrying about management problems.

Experts insist, however, that landlords could avoid many risks by checking out the background and record of a property management company, and by agreeing on an open account where all items of expenditure can be indicated. The practice is widely accepted on the market.

According to Oleg Smirnov, tenders to select a management company are often held. In 2005 alone, his company took part in 15 bids. But this does not prove anything. Only one landlord out of 15 can offer something interesting to the manager in the long run.

“Tenders are sometimes held by landlords who want to figure out what property management budget they can count on, and later they decide to operate the property on their own,” Smirnov says. Quite often landlords try to earn money from managing their properties by acting as if the building was run by a professional manager and increasing rental rates.

Soviet-era prejudices are another hindrance. “For a Russian to transfer something of his to someone else’s fixed assets is a feat,” Smirnov says.

Still, there are landlords who do hire professional managers in Moscow. Those, for the most part, are foreigners. Professional managers can be found in buildings built by foreign investors and occupied by foreign tenants, and in top class properties conforming to international standards.

At the Tenant’s Request

Oleg Smirnov says that many foreign tenants demand that the properties they occupy be operated by internationally known property management companies. In such situations landlords are forced to hire top class managers. The managers, on their part, can demand remuneration exceeding the average market fee.

The tenants’ demands are understandable. For their money, they count on a set of services and quality, as one of the risks a tenant faces is the lack of expected services, as reads the Property Management industry bulletin, July 2005 issue. That is why it is better to find out from the landlord or the developer who runs the property long before the tenancy deal is signed.

But for the time being the Moscow commercial property market is not a tenant’s market. Supply fails to satisfy demand. Top class offices and shopping malls are few and far between. The days when landlords will fight for management companies to attract tenants have yet to arrive.