What is commercial property and asset management?
The Royal Institution of Chartered Surveyors defines a property manager as “any person, who, in the course of a business (including a business in which he or she is employed), is instructed to manage an interest in real estate on behalf of the owner of the interest”
International standard ISO 55000 describes asset management as the “co-ordinated activity of an organisation to realise value from assets” (ISO 55000: 2014a, pg.4).
Can you see the difference?
The overarching idea above is a basic description of what a property manager is responsible for. When we get into more detail it becomes clear that good and effective commercial property management can be quite detailed and complicated because of its requirement to include many asset management principles.
The responsibility of managing another person’s commercial property is not to be taken lightly. A commercial property is more like a business or an active investment than a residential property is.
Commercial property management, when performed correctly, incorporates a combination of asset management principles.
Asset management differs from commercial property management in that it has a stronger focus on the strategic management of an investment or an investment’s objective.
Asset management decisions and strategies about property or investment objectives are more concerned with the economy, and the performance of markets, this is because commercial property is more sensitive to changes in the economy as it relies on its tenants who are business to be profitable or have any income at all.
A large retail asset owner would employ asset managers to ensure that the entire lease portfolio is correctly planned for and strategized.
With the goal to reduce liability and maximize benefits. For example: Having an in-depth understanding of when leases are due for renewal and when rents are to be reviewed as well as making decisions based on these time lines and details.
These decisions are made with the understanding what cpi (consumer price index) and inflation are likely to be at the time when leases are due for renewal and rent are to be reviewed, so a large amount of economic forecasting is involved at the more pointy end of asset management.
Asset managers would tendering reports on this information and the decisions that they have made policy and transaction wise and for what aim.
Commercial property management is more concerned with the day to day running of the operations of the specific property or property portfolio, like leasing, maintenance and compliance to lease terms etc..
Every commercial asset requires prudent management and proper strategy to ensure that it produces the best return for its owner and does not become a liability.
Both professions have a profound effect on the value of the asset when looking at the capitalization rate (% of return on amount invested) a purchaser would accept at the time of sale.
For example a building with a longer-term lease and a highly reputable tenant is a lower risk investment; therefore an investor will pay more for the asset and accept a lower cap rate due to the lower risk investment that the property now represents, meaning the seller sells for more.
The same goes for physical condition and almost everything else.
This is due to the seller having a good property and asset manager, who have over time implemented polices and strategies to develop the assets value with a stable long term lease and other value adding policies.
For simplicity I have divided the role of a commercial property manager into two parts:
1. Reducing costs and minimizing risk
2. Maximizing income and developing security
And please remember that I consider commercial property management to include many asset management’s concepts and systems as a course of proper management, this is opposed to residential property management or not fit for purpose commercial property management.
Reduction of risk and costs
The reduction of costs can be as simple as conducting a robust tender process for maintenance items that also ensures that the specification for the maintenance need is accurate to avoid overspending where it is not required.
This will ensure that all maintenance spends have the best cost to benefit ratio.
Maintenance planning and scheduling will also ensure that the asset is maintained to the highest standards as well as ensuring that the opex budget is accurate and fit for purpose.
For example developing a 10 year plan for building and facilities maintenance requirements which include a survey of the required services and operations as well as costing, will ensure that the manager has power over where the condition of the building will be in ten years and how much it will cost the tenants.
Opex management is a vital point.
Even though the Opex (Operating Expenses or out goings) is paid by tenants, budgeting for Opex is an important factor in ensuring that tenants can reliably plan for expenses and that disputes are kept to a minimum.
Many owner managed properties or assets use an on demand Opex type arrangement.
This means that when the owner gets the bill he then splits it across his or her tenants and invoices it to them. This way fails to take into account any planning for the future and usually in regard to maintenance is very reactive and not preemptive like a budget and a regular invoiced amount is.
Many owner managed properties use this system and only invoice rates bills, water bills, power (if any) and any reactive repairs.
The downside of this is that tenants have no idea about what their property costs will be from month to month and they may dispute the charges as it is harder for them to reconcile receiving any benefit for the invoiced amount especially if it is for a water leak that was not in their unit or cladding repair that they have not seen.
Unit allocation for Opex or division of outgoings can also become a problem as there is no systemized disclosure of the way in which the division of costs are done.
Professional managers should have a disclosure sheet that informs the tenant of their percentage of Opex payable and they should have a budget that informs the tenant of the line items that they are paying for.
This should be invoiced out to the tenant on a monthly basis.
The ability that Opex budgeting gives a manager to plan means that they can achieve a reduction in the invoiced Opex amounts and still have a very well-maintained building as well as happy tenants that are getting good value for their money.
It is extremely important to understand that Opex amounts paid by tenants to an Opex account are funds held in trust on behalf of the tenant, and are not the owner’s property. They remain the tenants funds held in trust by the manager for the purposes of operating costs of the property.
Good opex management and policies make happy tenants and a well maintained property means that the space is more desirable to new and existing tenants; this increases the assets value due to its leased assets being more secure.
Property managers that do not run accurate Opex budgets with costed maintenance plans are doing a disservice to the owner and the tenants.
Maximizing income and developing security can also be achieved by good practices when dealing with lease administration.
Lease administration, planning and strategy are vital to the long term positive goals of an asset especially when conducted with repositioning of space in mind.
A good property manager has the understanding that the value of the asset is its leased assets and advanced planning is vital to maximize the benefits and income of the asset.
The development of a leasing strategy begins with an aim; this could be to increase the value and tenure of the leases over time (security and income)
For this to be successful (over and above cpi and inflation increases) a property needs to provide or develop something of extra value for its tenants.
A property cannot move and make its location better; however, there are many ways that lease income and tenure can be increased.
A more tenant centric mix of tenants that benefits one another can be planed for and developed, for example a complex may be able to be re positioned to accommodate a veterinarian and a pet daycare or kennel and then advertised as such.
This means the benefit to the owner is that if one tenant leaves another in the same market will have extra reasons other than existing fit out to take this space due to it having a ready market for its services next door. In this way a property can have power over its location and benefit from its own tenants markets.
In the same way a large commercial space in the suburbs can reposition itself away from a large one tenant lease like a head office, towards a hot desking or serviced office leasing.
This concept can also increase income and develop security of tenure in different ways, for example in this situation you end up with many small lease agreements that spread the risk of vacancy over a higher number of tenants, this also allows for the owner to ask a higher lease amount for the flexibility of providing such a low risk lease to the tenant (shorter term).
A property manager that is versed in the market as well as having asset management skills can develop a property to be very profitable that is their job.
However, a property manager that has no understanding of asset management is only going to keep the building standing upright and may not even keep opex or leases up with cpi or inflation.
Lease planning and scheduling is an important asset management factor that a good commercial property manager should pay attention to.
Leasing agents have the same power over the properties profitability, where they are able to advise the owner about the leasing market and influence their decisions as well as the prospective tenants position on what lease clauses and tenures may be possible and what the owner should accept.
However it is more common that any agent is more interested in getting the deal done than the long term profitability of the property, and in many cases agents have leased a property and then with the knowledge of the leases been able to force the owner to lower their asking price.
Effectively lowering the value of the property for their own benefit, to gain a sale.
This is where a property manager with sound asset management skills can save and make a property owner money.
Many owner managed properties do not benefit from long term lease planning and good principals, this fact removes the ability to see and plan for the future.
The act of lease scheduling involves reading all the property’s lease terms, clauses and dates and inputting them into a lease summary and a schedule of leases for the property.
This schedule of leases enables the manager to see which leases are coming up for renewal and or rent reviews and allows them to see what the clauses of each lease are and what possible problems could be coming up.
Early communication with the tenant and early negotiation means that everything is done on time and that problems like vacancy can be mitigated more thoroughly and sooner.
Scheduling and summarizing leases is also critical to implementing a leasing strategy as it allows the planning to be undertaken for long term improvements, like reposition and tenant mix that can increase the value of the asset.
In summary a professional property manager with asset management expertise is the way to go as it is their job and their profession to make the asset or property more valuable by maximizing its value and its income by the programing and strategizing of the properties operations.
Using the services of an inept property manager or trying to self-manage often means that the property will be managed in a maintenance of status quo type style and problems will not been seen before they arrive or after they have occurred and been allow to get bigger and bigger until they are unsolvable.
This is also true for improvements not being taken advantage of.