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Just as there are clear benefits from doing thorough due diligence when buying real estate assets, there are equally valid reasons why this increasingly professional approach should not stop at the point of purchase. Active asset management of the property, once bought, should be the norm not the exception and there are a number of ways the purchaser can generate improved investment performance once the property has been bought.
Where is the leakage?
Owners are able to generate improved net operating income (NoI) by tightening up on their operating costs. This does not simply mean negotiating the lowest possible prices for all services to the building (although better procurement does play a part).
A more strategic approach for owners is to redraft their lease agreements to allow them to recover the full cost of operating their building from their tenants. The landlord may be spending Dh20 square foot on providing the building services, but only charging tenants Dh15. This results in an operating cost 'leakage' of Dh5 a square foot, which comes straight off the landlord's bottom-line profit.
Simply tightening up the service charge conditions when re-leasing or renewing the existing lease will immediately improve investment performance. That Dh5 square foot saved on a 200,000 square foot office building will mean Dh1 million annually to the owner's bottom-line. Capitalised at 10 per cent, this translates into an Dh10 million increase in the value of the property.
Reorganising the purchase of building services and then actively managing these services can also reduce operating costs. Placing service providers on clearly defined contracts, with precise scope of works and performance measurement clauses, and then actively managing these contracts can result in significant reductions in the overall operating costs.
Too often, service providers and facility management (FM) companies are allowed to manage their own contracts. There is often insufficient management control or involvement from the building owner in managing these contracts, resulting in additional costs incurred for unnecessary work or work which should be included in the service contract.
Utility costs can represent up to 30 per cent of the total operating costs of a property in the Middle East. Unfortunately, good metering, which allows owners to measure and record actual consumption per occupier, is rarely installed in even the best specified properties.
Without the ability to properly measure consumption at the point of use, it is difficult to actively manage utility costs and energy saving practices cannot be adopted. Installing meters for electricity and chilled water and then implementing an active energy management regime can significantly reduce utility costs, which translate straight to the owner's bottom-line or indirectly improve the rental value of the leased space in the building.
Working jointly with the retained FM provider to implement an energy management and metering strategy for one of our managed commercial buildings in Dubai, JLL has been able to successfully increase energy efficiency by as much as 15 per cent in this building. The lower energy bills have clearly improved the investment performance of the property and make it more attractive to corporate tenants who are increasingly demanding more sustainable office accommodation.
It may appear counterintuitive but once an investment property is bought, it should be managed as though it could be ready for immediate sale. This involves keeping all legal documents and records (including leases, service, contracts, etc) and financial reports, readily accessible and up to date.
Regular management reports, including leasing activity, should also be prepared and all statutory inspections/health and safety records kept up to date. If all of these good practices are carried out by competent professional managers, the asset will be a lot more attractive to potential purchasers doing their own due diligence.
Investors should not have to rely on luck or the vagaries of the market to achieve higher than average returns from their real estate dollar.
Active asset management is no longer a 'nice to have', but is becoming an essential contributor to outperformance in a more competitive marketplace. This involves considering any property as a financial investment, not simply a physical building that requires servicing.
Owners who adopt this philosophy and apply active management practices should expect to see outperformance from their property investments, whether in London, Singapore or Dubai.
Source: Graham Howat, Special to gulfnews.com
The writer is the head of property asset management at JLL Middle East and North Africa