In Depth: Management Function

Revenues and Pitfalls

Russia’s contemporary real estate market gradually eliminates inherited supply and demand misbalance for modern office, commercial, industrial and storage premises. The market distinctive features are the increasing number of participants in all the segments as well as gradual expansion of business, value and volume indicators for all the business sectors. Meanwhile the complexity of realized projects is increasing.

In this environment the property management function which entangles interests of all the market participants, is gaining prominence. Unfortunately so far many investors and proprietors are not paying due attention to it and don’t hire professional management companies. However the increasing supply of commercial estates inevitably boosts competition. Therefore any minor fault in property market positioning, as well as erroneously chosen strategy and tactical management mistakes may soon result in significant revenue decline or, moreover, generally question the feasibility of ownership of such problematic property.

The maturity of market economy is highlighted by fact that property management services are rendered now by virtually any large company engaged in commercial real estate. This is true as well for our Commercial Estate and Development Department of “Miel-Nedvizhimost Holding”. An example of our approach to client solutions is private property management (PPM) services, which focuses on the unique segment of generally well-known services. PPM is an organic addition to such services as brokerage, consulting, valuation, property management in all the segments of commercial real estate market.

Who Needs It

The intensive real estate market growth causes significant diversification of business lines activities of many owners. By other hand this process results in holding of significant number of non-core assets – usually comparatively small commercial properties that nevertheless require constant attention and expending time, material and financial resources.

The major feature of PPM services, still new in Russia, is focus on individual customers.

The description of the service itself – ‘private property management’ reflects this as well, and was created by our company experts as analogous to popular ‘private banking’. The typical proprietor is a successful entrepreneur (banker, industrialist, small business owner) who owns meanwhile some non-core property assets. Sometimes the list may be complemented by individual owners of companies, which core business doesn’t relate to property.

As a rule they have no time, experience or interest in direct day-to-day management, such as relations with tenant, technical servicing, organization of effective accounting and taxation system. The optimal choice for these customers is to entrust property management to professionals, who would secure maximal current rate of return or, better, constantly increasing profitability.

Dealing With Conflict of Interest

Another particular attribute of PPM services is a specific set of properties, usually single-level or two-level non-residential premises from 100 to 2000 sq. m. (though it’s quite an approximate estimation), located in residential buildings on principal city roads. These types of properties are very popular now among retailers and service companies, banks and insurance companies who wish to establish direct access to retail customers.

It would seem that there would be many offers to manage these sought-after commercial properties. However, practice shows that interests of proprietors and managing companies are not always the same. It is a paradox that professional property management companies prefer large business centres, commercial, office, industrial and resident complexes to above-mentioned popular choice of owners and tenants.

The reason for such a lukewarm interest is a small scale of properties. Any property management company is working for certain percentage or fixed fee. This means that their revenue depends on property size, increasing proportionally to floor space. The reality is that overhead costs tend not to grow anymore after certain size of property is attained. For instance, managing of both 2000 and 10000 sq m properties requires the same administration organization structure.

Our department experts have traditionally dealt with properties of all sizes and management of even comparatively small objects is an organic extension of our product line. The introduction of PPM services demonstrates that the gap between interests of owners and management companies may be bridged by more effective business collaboration organization.

Attention to Details

The first step to achieve the maximal economic result is to carry out profound analysis and develop strategy for utilization of each property. The clear understanding of such activity specifics and real clients’ needs are critical for making PPM service effective. Our approach is based on ‘the principle of reasonable sufficiency’.

In fact, exploitation of modestly-sized internal and semi-attached premises doesn’t require service personnel needed for large office or trade centre. Many functions may be outsourced, including cleaning and engineering. Some of the exploitation works will be carried out by tenants themselves. Meanwhile the imperative conditions are increasing of current profitability as well as optimization of finance flows and reporting and prospective capitalization growth. It’s noteworthy that currently minimal management contract term is for three years.

The fees of Commercial Estate and Development Department of Miel Nedvizhinmost Holding is 10 to 15% of the net operating income. Therefore we are motivated to attaining maximal profit on property and mitigation of maintenance costs. The major goal is property capitalization growth realized through certain number of actions, including legal title confirmation, re-conception of property, required infrastructure reconstruction (e.g. parking lots allocation, new energy and telecommunications options) or premises repairs, alleviation of service costs, enhancement of contractual relations with tenants, optimization of liaising with utilities companies and supervising bodies.

An example is property in town of Omsk, which has been managed by us for more than two years. This is 2000 sq. m. double-level premises, former Soviet-style food shop, situated at frontline of one of the major roads of Omsk. We assisted owner in buying this property and took role of management company. Initially it was absolutely ineffective property. The layout was inadequate, for instance total ground floor was 500 sq. m. while customer shopping area was just 200 sq.m. The ceilings were just a 2,2 -2,3 metres high, the basement was flooded, communications were inadequate, parking area was absent. However its location was ideal.

First of all we organized a parking area, obtaining all the necessary permits from local authorities. Second, we dried the basement and increased its height to 3 m, basically doubling thus the overall property floor space. We’ve changed the telecommunications line. Third, we found tenant, and it was one of the largest Moscow-based retail banks. Now it is bank head office not just in Omsk, but in whole Siberian region. This is two-level property with actively used basement, parking area and with one of the highest leasing rates in the town. As a result, we have not just increased the property capitalization, but decreased as well its payback period.

The attention to every detail, adequate solution of administrative, taxation, legal issues – all these result in predominantly new level of management of non-core assets portfolio for private customers. In majority of cases our expert team is capable of more than doubling the property profitability, and the capitalization growth may reach 120%.

Prospects

The introduction of private assets management service, which is new for Russia, principally enables client to release financial, time and material resources used in non-core activities. An opportunity arises to manage portfolio which comprises assets from diverse market segments (retail, office and residential estate) and various country regions. We manage currently two country properties in Podmoskovie, which we’ve received simultaneously with commercial premises, but this is exception however, as usually PPM services focus on commercial estates.

The best demonstration of PPM significance for owners and tenants is its high development rate. The value of current properties has tripled for 2006 from $6 to $18 mln. Currently we manage properties from 100 to 1000 sq metres. A tendency exists meanwhile that the size of managed properties is increasing.

The number of properties under management is increasing constantly, and the list of tenants includes one of the largest Russian retail banks, well-known clinics, largest Moscow network of sports garment shops, large d?cor materials retailers and other respected financial companies and network entities. The geography of the services is quite representative and includes Moscow, Moscow region St Petersburg, Barnaul and Omsk.

The author is the head of private property management project of Commercial Estate and Development Department of Miel-Nedvizhimost. This article is written exclusively for Vedomosti. The opinions, published in "Point of View" column do not necessarily represent opinions of the editor.