By Anna-Marie Smith
Investors in property portfolios are lured by potential growth in income distributions as well capital growth on assets, whereas occupiers of buildings prioritise management strategies as expenditure impacts bottom line earnings.
However, the livelihood of property managers depends on the vision, skill and performance of above average management teams in cohesion with equally skilled clients. Prudent management strategies, as highlighted in annual financial results in the listed property sector, provide sufficient evidence of how competence impacts on all-round performance. Some operators within specialist entities offer one-stop shops, while many large property owners retain management services in-house. Others may enter into combined service agreements, where, depending on the levels of expertise required for different parts of investments, specialists are best able to render skilled services.
The most noted attribute for excellent financial results is rental income. This was singled out by Norman Sasse, CEO of Growthpoint, whose annual results to June 2013 showed investors an outperformance of the company’s original forecast, with distribution growth at 7.2%. Growthpoint’s positive results as owner and manager of 393 properties locally, Sasse says, are attributed to the all-round higher performance of the company’s property portfolio. “Growthpoint’s distributions are based on sustainable rental income.”
Another vital management strategy is the reduction of operating costs, although challenging in view of ever rising utility costs. A case in point is Vunani Property Investment Fund, whose portfolio includes predominantly large buildings with national and some blue-chip tenants, which managed to outperform the sector amid tough trading conditions for the year to June. CEO Rob Kane attributed the fund’s sterling performance to “an innovative approach of maintaining solid growth in rental income, the containment of operating costs and retention of tenants.” He said upward pressures on administration and operating costs, i.e. municipal rates and utilities, electricity, water and waste, had been successfully managed and controlled through a combination of greening initiatives and prudent management.
Also advocating stringent cost management practices within outsourced property management services is Excellerate Property Services (EPS), which owns a stake in JHI Properties. EPS offers integrated services across the different segments of the property market. CEO Marna van der Walt says, “Through leveraging on group synergies we are able to provide market leading, integrated service offerings at competitive costs – a key imperative in today’s challenging economic environment where rising operating costs are a factor of concern for landlords and tenants alike.” She says increasingly property owners with investment portfolios of varying size and stature seek to outsource property and facilities management to professional organisations that are proficient and experienced in providing high levels of service in a cost-effective manner.
Leasing strategies are prioritised at specialist management company ERIS Property Management. Director Scott Thornburn says in-house expertise is essential at all levels as skilled management teams are required to act on behalf of landlords or tenants at different operational levels. He says customised facilities management comes into play, depending on contractual service agreements with clients, as it relates to owner occupiers, single tenants or multi-tenanted buildings.
Contractual rental escalations require forward planning. The early renewals of leases, regular increases of rental incomes, the reduction of vacancies, minimising of operating expenses and timely rental collections are essential. Other influencing factors impacting on end results occur in high demand geographical areas where top graded buildings located in prime positions show slow turnover, despite attracting exceptionally high rentals. “Long-term leasing strategies are vitally important to extend the leases of exemplary tenants prepared to pay a premium for exclusive office space,” says Thornburn.
The mitigation of potential risk through strategic intent as identified by the audit and risk committee of Vunani points to above average cost inflation from utilities, local councils and other property related expenses. Kane says that risk management has to be viewed in the context of reduced net property directly related to income. “This may occur when rental escalations no longer cover cost increases, possibly leading to defaulting tenants and vacancies. The risks associated with the increased cost of assessment rates, electricity, water and sewerage are transferred to the tenant in terms of the lease agreement. The non-recoverable component is managed by negotiating contracts with service providers.”
Facilities management through tenant liaison is core to the property management business.
Thornburn says, regarding Eris Property Management’s portfolio, which comprises 5 000 tenants, that the positive impact of constant tenant liaison is particularly notable in the event of non-payments. Managing the risk of vacancies requires ongoing operational strategies since tenant failures are known to increase during volatile market conditions.
Other essential services at Eris include legal teams, which offer in-house services for the protection of landlords, tenants and employees. He says although specialist legal cases are outsourced, Eris oversees contractual affairs as it relates to tenants as well as service providers. Skilled management teams offer assistance with regard to major legislative issues, such as health and safety aspects of SETAs and the labour industry.
Facilities and tactical management
Quality facility management services apply equally to owner occupied, single or multi-tenanted buildings on a national or regional scale. However, in addition to general building management services rendered, is the need for preventative measures to facilitate long-term maintenance and replacement programmes.
An essential role of good property managers, says Thornburn, is to incorporate heavy capital expenditure items in the long-term planning of property clients. This is due to high replacement costs of fixtures in large buildings, such as elevators, lifts and air conditioning systems, which mostly have a predictable lifespan.