View From Within: Netting Profits

While the office sector of the Moscow market has already been divided up by several leading management firms predominantly with foreign participation, the field of retail property management is still open for all. Property management networks have only just begun to explore the provinces, but market consultants are convinced their time will soon come.

In-house Managers vs. Outsourcing

There are in-house and external property management companies. In-house managers service their own properties. Most landlords believe they can trust only a company or a department within their company subject to their full financial and administrative control, Yevgenia Sokolova, general director at BridgeHead Company, explains.

That is the reason, RosEuroDevelopment’s experts believe, that nowadays few companies are willing to commit their properties to trust.

For example, the Vremya group of companies, specializing in retail property development, has set up a property management firm – Kapeks – to service the leisure centers of the Park House chain in large cities across Russia. The firm operates under Capital Group.

Alexander Sharapov, head of the company Becar, says that running the property on one’s own makes sense if its size exceeds 150,000sqm. But even then the landlord has a choice – either to set up a property management firm of their own or to discuss special terms with firms active on the market.

Experts at SlavGrad believe that these days all management companies seek independence and want to work on the open market without being bound to a single developer. An independent property management network must meet two requirements – ability to run several properties and offer a certain set of services.

“Where a company holds a number of properties in trust it is quite likely that its services will be somewhat less expensive [for a new client],” adds Dmitry Vorobyov, head of corporate development at Paul’s Yard commercial property department. “Being an experienced property manager, such a firm has a clear understanding of the structure of spending and that is why it is able to offer more flexible terms.”

Yevgenia Sokolova of BridgeHead says: “In addition to traditional services such as maintenance and servicing of buildings and trust management, we offer such services as brokerage, project maintenance, consulting, marketing promotion, including marketing research, naming, media advertising, and planning of the entire system of marketing communication. In other words we work both on the B2B market, and on the market of end users.”

“Each firm follows its own path to enter that business,” says Alexander Sharapov. “Becar (founded in St. Petersburg – Vedomosti) became a management company in 1998 upon securing a title to a building and opening a business center. In 2000, we opened one more business center. As we were accruing experience we began to offer outside services. Today, seven years later, in addition to running our own properties we offer professional property management services to others. In 2003, Bekar entered the regional market.”

Forum Property Management was established by Forum Properties, active on the Moscow property development market for 13 years now. Last year, in addition to managing 11 class A and B office buildings developed by its parent company, Forum Property Management took over the management of an outside property, an office and residential estate on Bolshaya Polyanka.

Torgovy Kvartal (Retail Quarter) Group also started by running its own retail and leisure facility – the 38,000-square-meter Torgovy Kvartal on Svobodny in Krasnoyarsk. Today the company operates the 26,000-square-meter Shokolad (Chocolate) shopping center in Nizhny Novgorod and the 14,000-square-meter Astor in Astrakhan (construction of the second phase of Astor – 26,000sqm – is currently underway).

Other companies involved in property management are professional property managers who offer their services solely on the open market.

“Unlike management companies operating under development firms we do not have a guaranteed volume of work,” says Yelena Saratova, head of the property management department at Noble Gibbons / CB Richard Ellis. “We have to be competitive, offer better conditions, lower rates and high quality.”

The main reasons why landlords benefit from cooperation with external management companies are higher rental rates charged at professionally managed properties, higher occupancy rates and lower overhead costs, and effective re-investments which boost returns, IB Group’s experts say.

Moreover, external property management firms offer landlords extensive public relations services, government backing, development planning based on market research and analysis, prestige, risk-free operations, and a creative approach towards commercial property management.

“Establishing one’s own property management company makes sense where the landlord’s core business is property development and they plan to build at least two or three more properties and to offer management services to other landlords later on. But the key question for the developer is whether they want to run commercial properties and make it a priority line of their business,” says Mark Afraimovich, managing partner at Torgovy Kvartal.

Hiring an external property manager is appropriate if commercial property development is not the mall owner’s core business and the shopping center they are launching is the only project of the company. “Also, cooperation with a professional management company is strongly recommended if the landlord lacks property management skills,” he adds.

In Safe Hands

Most professional property management firms operate in the office sector. Nowadays, there are about 30 companies offering commercial property management services in Moscow, Andrei Fedaka, general director at NAI Vesco, has reported. Last year, their number did not exceed 20, Fedaka says. Experts at SlavGrad report that when taking part in tenders they have noticed that about 20 management companies have entered the market over the past two months.

The leading positions on the Moscow market are held by major international firms, such as Sawatzky Property Management (the Greenwood business park), Noble Gibbons, which manages a business center at 24 Timur Frunze Street, the second phase of the World Trade Center II on Krasnopresnenskaya Embankment, office properties and McDonald’s restaurants, Lukoil’s headquarters – a total of 15 class A properties across the city; and Colliers International that runs the shopping centers RIO and Zolotoi Vavilon (Golden Babylon) II, and office centers including Hermitage Center, Stanislavsky, and Dukat Place III.

The leading domestic firms are Forum Property Management (the Aurora Business Park, River Place, and Sokol Business Center) and ALM-Management (office centers at 17 Iskry Street, 8 2nd Brestskaya Street, and 19/2 Roshchinsky Proyezd). SlavGrad Group, too, has made commercial property management its core business.

Another major player is the St. Petersburg-based Becar, which launched operations in Moscow this year. Becar runs 137,000sqm of commercial properties.

M+W Zander Facility Management CIS runs 13 branches of Citibank (a total of 7,500sqm). Three branches are situated in St. Petersburg. The company has also signed a deal for the technical maintenance of the offices of the company Regus on the premises of the Smolensky Passazh office and retail center.

The problem of proficient management of class A office properties in Moscow has virtually been solved and, according to Oleg Planovoi, a managing partner at Property Management Company, the market has been divided between professional companies. But the state of affairs in other regions of Russia is different.

“In the provinces it is difficult to find a management company offering the entire spectrum of services, apart from building maintenance and cleaning,” Yevgenia Sokolova says. “On the other hand, there are professional foreign firms whose services are quite expensive, but they do not take much interest in properties that are less than 50,000sqm.”

Natalia Korotayeva, commercial director at RosEuroDevelopment, notes that the problem of the Russian provinces lies in the fact that there are still no professional managers operating a sufficient number of properties there. Local firms are not experienced in running prime office and retail properties.

RosEuroDevelopment is currently negotiating with several management companies to run the RosEuroPlaza business center in Novosibirsk, and on the basis of the outcome the company will decide whether it will run the property on its own or resort to outsourcing.

For the time being, commercial property market analysts are not sure that landlords are ready to let professional managers take over their properties.

“There are two reasons why landlords reject the services of management companies. They are the low level of culture and the urge to economize,” says Andrei Fedaka. “As a result, it transpires that the landlord not only fails to save money but also suffers enormous losses. While a professional management firm is able to slow down the wear and tear rate, reduce maintenance costs, optimize spending, maintain the building in a proper condition, the actions of those who lack the necessary skills may bring about very different results: quicker wear and tear, higher costs, and in the long run, a downgrading of the property and lower revenues from rent.”

Retail Falling by the Wayside

The professional managers’ path to the retail sector has proved even more time-consuming and difficult. The retail property market has always been behind the office sector, Yelena Saratova says. Even today landlords still underestimate the importance of professional management, notes Mark Afraimovich.

Many developers still regard ‘management’ as a narrow set of technical maintenance services, although a shopping center is an extremely sophisticated mechanism and a management company in charge of running it must be able to regulate relations with tenants, control financial flows and marketing. A profound understanding of all the aspects of the business is the key to high returns and the viability of the project.

“If in 1998 when we were building our first business center nobody took any interest in the services of property management companies whatsoever, nowadays – as the number of buildings developed, sold and let with a view to diversifying operations grows – the demand for management services grows, too,” says Alexander Sharapov.

The Stolitsa Nizhny development company has already built two shopping centers in Nizhny Novgorod – Etazhi and Respublika – and is planning the construction of a 120,000-square-meter retail center. The first two projects are currently run by Stolitsa Nizhny’s own management firm, but the manager for the latest development will be appointed through a tender.

Most professional management companies are looking for contracts in the regions and find them. “Landlords have to enter into agreements with Moscow-based managers who posses the know-how to ensure maximum returns,” says Oleg Planovoil

Experts believe that it is difficult for separate management firms to survive, which is one of the reasons why management companies are usually established within development companies or operate as part of holdings.

Those wishing to establish an independent management company have to remember that the company will only start making a profit after it secures at least three properties in trust. An exception to the rule is a large shopping and leisure facility.

Multifunctional complexes featuring offices, retail space, hotel rooms and leisure facilities are the most complicated in terms of property managers. “We had to drive a lot through Europe and the United States to gain experience,” says Alexander Sharapov.

Mark Afraimovich says you can count on the fingers of one hand the number of professional management network companies who, upon signing a deal today are ready to go to the regions tomorrow and immediately take over the management of a retail center by launching operations, signing all the agreements, and establishing relations with tenants and technical maintenance firms. That is why the demand for managers is growing rapidly in the regions.

Oleg Planovoi is not as optimistic. By the end of 2006 Рroperty Managеment Company plans to take over the running of one more retail center in Moscow. “We will not move to the regions before we have at least four properties in the capital,” he says. Planovoi noted also that he is only ready to take up new projects if he has the time and people to spare and only if he is sure that he is able to offer services of a better quality.

Management Prospects

Analysts agree that the future belongs to professional management companies. The preconditions for that, according to IB Group’s Yuri Borisov, are growing professionalism, and greater competition and demand for their services across Russia.

Andrei Fedaka is convinced that competition between professional management companies is a compulsory condition for the development of the commercial property market. And that competition will grow in the future.

In terms of quality of services Russian companies will soon be able to vie with the leading Western property managers operating in Russia. The competition will result in lower rates, making their services more affordable. “But this will take a number of years,” notes Yevgenia Sokolova.

“An average Western management firm runs 1-2 million square meters of commercial property on average,” notes Alexander Sharapov. “Within two or three years we will work towards running our first million.”

“SlavGrad Group is constantly working to increase its portfolio,” says Vladimir Podkolzin, managing partner at SlavGrad. “But the company’s core business is providing a full range of services on the site. That is why our clients will be those who are ready to consider us as a strategic partner to the project.”

“The proficiency of our specialists makes it possible for the company to run five shopping centers at a time,” says Afraimovich. “Next year we plan to take over at least five properties, including two in Moscow, and that is only on the basis of the negotiations that have been completed.”

As of 2006 Torgovy Kvartal will take over the management of office centers. The group is currently in talks to manage class B+ offices in Volgograd, Kaliningrad and other cities.

Property Management Company, on the contrary, is in no hurry to explore the office sector. Managing offices is easier and the company decided to begin with more challenging retail properties, says Planovoi. Managers have a bright future, he says. He is convinced that within 3-5 years the number of developers and landlords wanting to run their properties on their own will drop. Confronted with a variety of problems arising from mismanagement, landlords will be forced to turn to professionals. Those companies who are active on the market at the moment “will have a share in that pie”, he says.

What is most important for developers today is not to miss the boat, Mark Afraimovich says. Very soon management companies will refuse to take over unsuccessful properties. New development companies will hire them at the earliest stages of their projects. As a result, managers will be too overwhelmed with orders and will have no time to spare to revive failed projects.