Market Know-How: Floor Washing and Financial Control

An experienced property manager is the one who is able to ensure good quality of all vitally important operations on the site and boost returns on the project. Many building owners have long come to realize that.

Time has come to find out who will claim the role of that very experienced manager in the near future. Will those be the property owners themselves – mall developers, or real estate consultants who are keen to conquer the entire services market? Or, will the market witness the emergence of a new class of independent property management companies?

The real estate consultancy Cushman & Wakefield / Stiles & Riabokobylko (CWSR) has reported that retail real estate accounts for 49% of all commercial property investments.

Speaking at the international conference “Modern Retail Formats for Big Cities”, held in October under the aegis of the Russian Chamber of Commerce and Trade, Oleg Voitsekhovsky, managing director of the Russian Council of Shopping Centers, said that the figure cited by the consultancy was even underestimated.

In his opinion, Russia remains a “virgin soil” for local and international retail investors, in particular, as far as large malls are concerned. Furthermore, Moscow holds the lead among Eastern European capitals in terms of volumes of shopping center development, along with Bucharest and Sofia. Returns on mall development projects in Moscow reach 10 to 11%.

At the same time, a state-of-the-art retail complex will fail to yield profits and become an investment product that could be of interest to would-be buyers – domestic and foreign operators – unless it is run by a professional management company.

As Russia’s real estate market expands and demand grows, the demand for services of full-fledged property operators will grow as well. When mulling acquisition of a shopping complex as a ready-made business, the buyer always inquires who runs the property.

Oleg Voitsekhovsky reports that the leading roles on the Eastern European investment market are already claimed by investment funds Morley, Dawnay Day, Credit Suisse and property services companies Meini and Europolis.

So far Russia has seen but a handful of acquisitions in retail real estate. The highest-profile deals involved shopping centers Zolotoi Vavilon, Global City, Rostokino and Okhotny Ryad in Moscow and Torgovy Kvartal Na Svobodnom in Krasnoyarsk.

Ideal Property Manager

Market operators still associate the image of a Russian property manager rather with a certain company hired to oversee day-to-day maintenance of a shopping center, cleaning services, repairs of engineering systems and technical control over the state of premises. Many still believe that it is the landlord’s job to oversee marketing, design, tenancies, and, of course, financial operations, including control over rental payments, revenues and expenditures, tax payments and legal issues.

Meanwhile, in the West professional property management companies quite often take over the entire operation of malls, taking full charge of financial matters and thus offering owners a chance to enjoy the fruits of their businesses. Widely practiced, for example, is trust management where a property of companies or individuals is temporarily transferred to trust of an agent under a special agreement, authorizing the agent to derive income in the interest of the property owner.

Market experts say that Russian property owners are not ready yet to outsource all operations in their malls. Of course, a lot depends on developer’s goals and objectives, for example, whether the project in question is an individual development or the company plans a nationwide network of malls, whether the building is raised for own use or the developer plans to sell it to an international investment fund in the future.

The sector still has no clear-cut segmentation, hence it is not possible to say exactly how many independent companies offering financial management services in malls operate in Moscow and how many firms specialize in marketing and property maintenance, Boris Avksentiev, managing director at CWSR, confirms.

Every Russian analyst has his own vision of what a professional asset management firm should be like and what it is supposed to do. General director at Regiony Management (Regions Management), which is part of Regiony Group (a former unit of AFK Sistema), Yuri Naidyonov believes that management companies are to be assessed by financial criteria, as well as criteria of quality. For example, a successful mall must spend no more than 10% of its annual letting income on property management operations (including technical maintenance). The quality of the management company’s performance is determined on the whole by dynamics of buyer attendance.

The tasks of a property management company running a shopping center, provided the project is viable and designated for sale, are as follows, says Vladislav Zabrodin, managing partner at Capital Legal Services. The operator takes part in commissioning of the project once construction works are completed, collects rental payments, signs agreements with utility providers, controls their performance and deals with other services providers, carries out regular repairs, maintains relations with suppliers of equipment, establishes and maintains relations with government bodies and controlling agencies, observes fulfillment of legal provisions on use and maintenance of real properties.

Managing partner at the property services company Colliers FM, Konstantin Baranov, says that an independent management company that focuses solely on operations in Russia is able to survive and even earn profits as long it has its own know-how and ability to boost capitalization of properties and report good financial results. On the whole, independent facility management companies, which are not part of development firms or brokerages and are involved solely in property services, or, for example property management networks are very rare in Moscow and other Russian regions.

Owners of Russian projects practice different ways of enlisting property managers’ services. There are projects where a landlord maintains his building himself and hires a management firm to control tenancy relations or plan a marketing campaign for the mall. Quite often owners outsource all maintenance operations. Nowadays, building owners most often hire property services companies to oversee maintenance of all engineering systems, marketing, selection of tenants and control over their operations, analysts report.

Conflict of Interest

Property consulting companies, which have always been involved mainly in brokerage, consulting and marketing, nowadays are showing keen interest in running commercial properties, in particular, shopping centers. Those companies are not only ready to assume the entire operation of the ready-made project up to trust management; they dream of walking hand in hand with building owners throughout all stages of the project – to advise the developer in early stages, to act as leasing agents and finally run the completed development for a management fee.

An indicative example is that of the first project by Markos Group to build a shopping center on the site of a former marketplace next to Altufievo metro station. (The 42,000-sqm project is estimated to be worth $45 million.) In the beginning, Markos hired the company Torgovy Kvartal (development, consulting and property services) to develop the concept and broker tenancies for the project. A source in Torgovy Kvartal admits that the company had hoped to take over the management of the future store. But at a later stage TK pulled out of the project, after the developer had tasked the consultant to ensure what TK saw as unrealistically high returns on the project. Colliers FM also rejected the proposal to run the shopping center. According to that company’s estimates the property could bring not more than $600 to $1,000 per 1sqm per year.

Eduard Apsit, general director at Facilicom Group, says that there is nothing extraordinary in the owner’s behavior in this case, which may be regarded as a form of a tender to hire a manager; the owner holds talks with contenders in order not only to figure out what they have to offer but also to examine the market situation. For the time being, financial management remains an open question for independent property operators. Konstantin Baranov believes that in theory Russia has operators who are able to offer financial management services. But so far there is no demand for their services.

In the opinion of Yuri Naidyonov, when talking about an ideal management model it would be appropriate to name financial management as the key criterion for assessing performance of a management company. An ideal property services provider must undertake full control over financial flows, and, of course, provide the owner with detailed monthly reports. “But considering that Russian financial and economic institutions are also only being formed, major international asset management agencies exercise caution; they do not have sufficient experience in operating Russian retail properties,” Naidyonov says.

“As to domestic operators specializing in financial management those are few. Besides, many Russian operators still lack transparency. That is why at this stage of market development we believe that mall owners should exercise personal control over financial flows.”

Mall owners have nothing against consultants especially if those are successful, holds Tatiana Kovalyova, deputy general director at the company Ekoofis (developer of Podsolnukhi shopping center). But they are not ready to accept cooperation schemes offered by consultants, at least because the Russians still have no experience of such work and believe that fees are too high (10% from annual income from rent).

Consultants’ Ambitions

Active on the international market of property services and facility management companies are, for example, such companies as Donaldson or ECE. Perhaps, Moscow-based consultancies seek to resemble them or their own branches in other countries where the demand for property management services already exists. Property services units have already been launched by Big Four real estate services companies Colliers International (Colliers FM), CB Richard Ellis / Noble Gibbons and CWSR. The company Knight Frank has recently established a unit to run high-rise developments.

Konstantin Baranov has reported that Colliers International launched a property management unit in Moscow approximately at the same time when the brokerage was established, in 1994. The original plan was to spin off a separate company that would focus on property management services. At first its name was Colliers CPM. The move gives an edge to the brand, Baranov says. The demand for such companies or property services offered by real estate consultancies is yet to grow, but their creation cannot be called premature. “We are in a long-term business,” Baranov continues. “Before other international managers arrive in Russia we are to win confidence of local players. Should we succeed we will enjoy an advantage at tenders. Building a management company is a hard daily toil, you cannot form a professional manager within six months.”

Given great differences between property management and brokerage it is convenient to spin off independent companies. “Property management experts at Colliers FM do not have to join projects in tandem with Colliers International’s brokers,” he says. But if a mall owner is interested in the full package of services provided under the same brand such cooperation may prove very effective –common team spirit will play its role. Today, property owners already begin to ponder on how to find a company capable not only of filling the property with tenants but also to control their operations afterwards, Baranov said but refused to cite any examples.

Colliers FM’s potential enables the company to offer practically all property services – from project consulting to building maintenance and trust management. Monthly consulting fees stand at $8,000 to $15,000 (consulting may last up to 24 months), Baranov says, but they do not constitute the main source of income. The company sets priority on winning tenders to run and maintain properties. The cost of the full package of property management services (excluding financial management) may vary from $70 to $90 per 1sqm and depends on the total area of the property. Contracts are signed for a term of three years or longer.

Baranov refused to elaborate on the number of staff and projects already run by the company but assured your correspondent that Colliers FM employs a strong team of professionals in all fields – from financiers, lawyers and accountants to cleaning services operators. If a building is too large and the company runs out of workforce certain jobs may be outsourced. Today Colliers FM is negotiating deals to operate two mixed-use complexes both providing retail spaces (30,000sqm of shops in one of the buildings and 35,000sqm in the other). The company is ready to partially take over financial management of those projects – to bill tenants, collect payments and maintain ties with city authorities.

Unlike Colliers, CWSR runs a commercial property services department within the company. “It is an integral part of CWSR with access to all resources and information available in the company,” Boris Avksentiev reports. The department established in 2004 in response to changing market requirements employs 35 people on permanent basis. CWSR runs the shopping and office complex Arkadiya (Arcadia). Media reports are available to show that the company has been working on the project since its earliest stages. It took part in the work on the concept, brokered tenancies and carried out a marketing campaign and finally took over the operation of the building. The 35,000sqm Arkadiya is the only retail property run by CWSR. The company oversees cleaning, security service and regular repairs on the site and maintains tenant relations. Financial management is carried out by Arkadiya’s owner, Turkish firm Tobtim International Trade Centres.

The management fee is fixed in the form of a percentage from the operating budget of the mall, Boris Avksentiev says. The operating budget represents 10 to 20% of the total annual budget of the mall. The operating budget may be conditionally divided into 12 months to determine the size of the monthly management fee the company receives for its job. Non-anchor retailers renting shops in Arkadiya are charged $1,000 to $2,500 per 1sqm per year; offices are let at $500 to $700 per 1sqm per year.

Dubious Universality

The only Big Four company that does not offer property management services is Jones Lang LaSalle (JLL). “In other countries JLL does offer commercial property management services, with a portfolio of over 90 million sqm under management worldwide,” Vladimir Pinayev, managing director at JLL Russia says.

“The reason why the company decided against introducing this service in Russia is that property management today does not create a synergic effect for companies such as ours. We focus on promotion of paying and highly differentiated lines of business such as consulting, brokerage and investment banking. Our vision of business is based on providing complex services. Property management being a rather specific service that does not yield desired results.”

“It is quite hard to become a professional if the company offers the full range of services,” Eduard Apsit is convinced. “Where a property management company holds a tender and hires contractor to perform various operations, such an arrangement has a right to exist. But if a company is, indeed, an “all-in-one” operator, such schemes are always less effective especially when the property as large, judging by my experience.” In the opinion of Apsit, operators’ desire to secure a foothold in as many business segments as possible and squeeze the maximum out of the market is understandable. Property management becomes an attractive field as such agreements are usually signed for duration of several years.

Oleg Voitsekhovsky believes that there are still no professional managers among consultants – even the Big Four companies. Abroad, market operators are skeptical and distrustful of companies who position themselves as jacks-of-all-trades.

Do-it-Yourself Approach

The retail real estate market in Russia is dominated by landlords who have developed their properties themselves. Those are, for the most part, companies who combine functions of owners, investors and developers. Shopping centers in Russia are built mostly by professional developers. Moreover, there is a group of developers who specialize in mall construction. Professional development companies feel no need to hire an external manager as they are perfectly versed in the field themselves, holds Tatiana Kovalyova. Every respectable development firm runs own property management department.

There are landlords who have built only one retail center. Those are, quite often, companies whose core business is other than real estate, as the case is with Kashirsky Dvor – Severyanin. Or those, for whom that one and only property became a pilot project but not the last one (Markos, Ekoofis or Don Stroi). But even such owners prefer to control their financial operations and other strategic issues on their own. Sometimes they even hire cleaners themselves, instead of hiring contractors operating under famous brands. “If I had no idea what to do with spare cash then perhaps I would hire a property management company; for the time being we direct our funds to new construction,” Tatiana Kovalyova says.

On the other hand, she says, she would willingly hire a consultant to operate Ekoofis’ furniture store Mebel Rossii (5,000sqm), if the manager proved his profound knowledge of furniture sector. But finding such a company is extremely difficult. Developers have yet to accrue experience in cooperating with management companies. At the same time Ekoofis from the very beginning was planned as a complex company employing its own teams in charge of facility, property and asset management.

“Hiring a professional property management company makes sense for an owner whose core business is not real estate,” Tatiana Kovalyova is convinced. In her opinion, the market has still seen no active offers on the part of consultants – property managers. But perhaps the future belongs namely to those companies. It is not bad, after all, when everyone pursues his core business.

Often developers whose first projects proved successful undertake new developments (DVI, Capital Group, Torgovy Kvartal, Garant Invest, Sistema Hals, Vremya, A.N.D. Corporation and RosEuroDevelopment). Some go even further and announce plans to establish chains of retail centers across the country. For example, Regiony Group plans a second chain of 30 to 40 stores in several Russian cities.

A separate group is made up of major retail operators. International companies, such as IKEA, run their projects on their own, both in Russia and abroad, Natalia Altynova, aide to IKEA Russia general director, has reported.

Eduard Apsit puts down owners’ behavior to the current stage of development of the Russian market. “For the time being Russian investors prefer “toying with their own malls”,” he says. The cost of construction is so high that developers seek to squeeze maximum profits out of their properties. Later on, the situation may change and Russia will have a developed market of property services. Nowadays, as the Russian real estate market is only being formed there are no ‘old age retirees’ here who focus on investment without burdening themselves with management problems. Nor there are enough investment funds whose scope of activity is limited to investment and ownership.