The Case for Professional Local Real Estate Asset Management
When vacancy rates for most real estate sectors remain stubbornly high and the prospects of oversupply continuing for years to come present a gloomy outlook for owners of all except the best property, what can be done?
Many building owners seem to hope for the best as far as keeping existing tenants is concerned and trust in the real estate brokers in the local market to bring them tenants when others leave. It seems that surprisingly few take proactive steps to avoid finding themselves in this situation, and fewer still understand the nature of the local broking market. Some do not consider retaining an asset manager, or those who have professional asset managers in-house, or as advisers, are most often based in London, Warsaw or Vienna. Others think that having good, efficient property and facility managers should be sufficient.
The first misconception building owners need to face is that Budapest is a brokers market and a broker makes money on turnover. No broker is therefore incentivized to help building owners keep tenants in a building, unless the fees the owner is prepared to pay are equal to, or greater than, the fees they would receive for taking the tenants elsewhere. One would think that this is obvious, but it is often a point which is not understood by owners coming from markets such as the UK and Ireland, where the brokers are normally part of a full service consultancy organization where a longer term outlook is taken, diverse services are packaged and provided by the same real estate consultancies and client loyalty puts a brake on the broker mentality.
Secondly, rents levels for all commercial sectors of real estate in Hungary have now reached such low levels, that simply offering a lower rent or other financial incentives hardly has the effect it would have done five years ago. The incentive rent level below competitors rent levels is now marginal. Indeed, reducing quoting rents and service charges has led some building owners into situations where they simply cannot provide any meaningful level of service to their tenants. Even inexperienced tenants sense this when searching for occupational property and I would maintain that the effect has almost become counter-productive for some buildings.
So what can be done? Every building owner needs to take a hard look at the placement of its building in the market, the benefits it offers to its tenants and its future competitiveness. This is a necessity, as the alternative of simply selling the asset (as was typically the case between 1989 and 2007) is no longer a possibility, unless the owner wishes to take a large loss. Very often, an objective view can only be provided by an external expert who understands the peculiarities of the local real estate market.
Location and quality are obvious enough, but what about an objective assessment of how competitive the building is in terms of its amenities, the true level of its property and facility management services and costs, its utility costs and how the building physically meets current and future demand trends? For example, the majority of recent new large office leases in Budapest have been to international service center tenants. Their requirement for large, efficient deep space capable of high occupational density, flexible technical solutions and low add on costs simply cannot be provided by many office buildings constructed in the 1990s.
Assuming you are fortunate enough to own a building which can still be fundamentally competitive in terms of location and physical structure (following internal reorganization and renovation if necessary), how can a local asset manager assist you further?
Quite apart from being able to act on behalf of the owner in managing the essential property and facility management services necessary in any building, to a competitive level (which requires knowledge of the respective levels provided by your competition) there are two key areas.
The first, a strategic overview applied to buildings and portfolios based on local knowledge and experience, we have already touched on. Translating this advice into action which protects your buildings and tenants is the next step. This is proactive asset management at the level of lease restructuring and renewals which we began back in 2007 on behalf of our clients. Yes, we had to accept concessions and some drops in income, but five years later, almost all of these tenants are still in occupation in our client’s buildings. This was a course of action which many building owners either did not contemplate, or if they did, it was a case of “too little, too late”.
What if the building was already substantially vacant, you may ask? Well, this presented a more challenging problem. If the building requires capital expenditure to become competitive, it is often not available, as neither owner (whose original 20% equity is often now worth nothing), nor debt providing bank are prepared to provide it. In the case of the banks, this is a critical error arising from the fact that financial analysts cannot justify additional capex, due to a lack of knowledge about the details of real estate and therefore the prospects of its return. Unlike paper financial instruments, real estate is not a homogenous product which can be easily priced. Many real estate assets have ended up in liquidation, forcing a write down of 50% or more of loan value, for want of a 10% (of value) capital injection as a result. For this reason, I would suggest that banks as “building owners” via debt can also benefit from specialist real estate asset management advice!
The second key area comes down to relationships and understanding the local business environment. Budapest can now been seen as a reasonably mature real estate market. It has experienced two boom and bust cycles since 1989 and 90% of the tenants in the market have been here for some time. How then to attract and keep these clients (and note that they are clients, not just rent payers as some buildings would treat them)?
I would say that it is essential for any building owner not only to know who they are (directly or through brokers), but to know their decisions makers personally and to understand what drives their businesses. For example, service centers are far more sensitive to availability of public transport and local amenities due to the competition with other service centers for their personnel, than they necessarily are to rent and service charge levels. Logistic companies are not only sensitive to location and amenities but also to on park services and lease length, which is driven by their clients, and so on. This is not a level of relationship and understanding typically provided by a broker, but rather by an organization which is driven by a much more long term view and non-conflicting client loyalty.
So, if you are a distressed building owner, you should ask yourself; „Do I have a local representative who I trust to pursue my best interests to a level which I myself would seek to attain if I had the necessary local experience, knowledge and contacts?” If the answer is „No”, then a reappraisal of your building or portfolio and your local advice is overdue!