Asset Management: Models for Investor Delivery
Asset Management: Models for Investor Delivery
Property assets range from Retail, office, industrial, leisure, residential, and health & education
The operational management of these assets is performed by:
These real estate practitioners are charged with a variety of tasks such as budgeting and reporting; managing tenant relations; marketing; tracking accounts payable and receivable; and ensuring physical assets are well maintained (Glickman, 2004).
tenant licences and additional supervision
service charge functions
inspection and tenant liaison
reporting and data management
How do 3rd party PM make money?
PM is a low margin business.
Cash Fees, per tenancy
Management Fees, payable by the tenant for delivering the service charge items
“The management fees charged should comprise only the reasonable costs and overheads borne in the process of operating and managing the services. It is recognised that whoever is providing the service is entitled to cover their costs and overheads, including a reasonable profit element.” Service Charge Code
Additional fees from tenants to alter, assign
Additional fees from landlords for additional services e.g. health and safety
Cross selling to landlords
Commissions from suppliers?
Is property management a source of competitive advantage? It depends who for and whether PM is a 'core' part of the business. For firms like Land Sec., British Land etc. - YES. For firms like M&G, Standard Life, Morgan Stanley - NO.
RE Investment Specialists:
Diversified RE investors with limited location or sector focus can replicate in-house property management capability through outsourcing.
Portfolio size, focus and structure tends to be relatively stable but the geographical dispersion of assets does not facilitate a centralised operational delivery platform.
However, given that the primary focus of the organisation is on RE, property management tends to be regarded as a core competency
Multi Asset Investors:
Diversified, multi-asset investors with limited location or sector focus, can replicate in-house capability through outsourcing.
Portfolio size, focus and structure may shift in response to tactical asset allocation or capital in/out flows.
The geographical dispersion of assets does not facilitate a centralised operational delivery platforms.
Given that the primary focus of the organisation is on non-real estate business streams, property management does not tend to be regarded as a core competency.
Specialist Real Estate:
RE investors specialising in a specific location or specific real estate sector tend to develop a strong, in-house capability that is difficult to replicate.
Their portfolio size, focus and structure tend to be stable.
The limited geographical dispersion of assets facilitates a centralised operational delivery platform.
This differs for sector specialists, asset and market knowledge is expected to be deeper and difficult to replicate.
Property management tends to be regarded as a core competency.
Property management is believed to affect investment performance mainly through tenant satisfaction
Asset managers are primarily responsible for helping passive owners achieve financial goals through the development and implementation of investment strategies (Jackson, 2012)
acqusition and disposal
Value add: refurbishment, lease re-gear, surrenders, lettings etc.
Property management supervision and liason
Different models of 'management':
Typically it involves the shifting of business functions “previously governed internally to an external supplier through a long-term contract” (Quelin and Duhamel, 2003, 647).
"the fundamental decision to reject the internalisation of an activity" (Gilley & rasheed, 2000)
Outsourcing tends to work better when:
Asset are not specialised
The tasks can be clearly defined
The tasks are not sources of competitive advantage
The functions are easy to replicate
Motivations for Outsourcing:
The main problem when it was internal was accountability and your ability to crack the whip. When you’ve got internal staff…
it is much easier to go after performance and deliverables when you’ve got an arms-length relationship than when it’s not arms-length.
That’s the key difference.
…before 1999 it was in-house. T
o be honest with you, it wasn’t done very well. We were amateurs at this.
We didn’t have a very large, specialised property accounts team. We didn’t have a specialised H&S team. We didn’t have the broad range of experience that you need to manage properties.
Flexibility (Risk transfer)
Last year we brought £300-£400 million into it. So at a stroke, you need to put a lot more people onto it, manage it etc. You can flex it...You have to be able to manage those flows of capital. Our agreements allow us to do that.
Whether it’s for stocks, shares, property, we’re an investment management company.
The actual PM side of things is non-core. Also we thought that we could get better practice by putting it out.
Economies of Scale:
…they’ve got a regional platform with offices…That means that they can service those regional assets far more efficiently and cost is reduced from our perspective...We knew that we were going to have to change our IT platform as well …
can spread that cost among many more properties.
I don’t think that it was ever intended to be a cost saving exercise. Costs savings haven’t actually been achieved even if we didn’t actively go out and seek them. It was more a case of an offsetting liability.
Problems with Outsourcing:
One agent used to charge a fee to go onto their contractors list. So you’d not be considered for work unless you’d paid a fee to that agent…Clearly that was an important source of income for them. It was claimed to be for administration purposes but the fee bore no relationship to that.
You lose the relationship with your tenant/customer. It’s the sheer size. Can you maintain that relationship? That’s where propcos sometimes have an advantage in terms of their portfolio or their staffing. Their raison d’etre is slightly different. Ours is a pension fund.
The mentality of some of these providers is that if there is a service charge, that service charge will support a third party expert – mechanical engineer whatever – to advise on that property. The managing agent is pushing aside their own responsibility to have expertise, to manage and to oversee.
To help manage PMs, some investors have dozens of KPIs (while others have none).
Common ones include:
% rent collected within x days
% service charge collected within x days
% insurance collected within x days
Response times to tenants
Compliance with H&S
Completion of inspections
Financial penalties are common. Financial incentives (‘Carrots’) are not.
Outsourcing Property Management? An Evaluation of the Rationales and Motivations
An important feature of real estate as an asset class is that it requires a relatively substantial (if variable) operational management input by the investor and the occupier
Property management activities:
data management and reporting
processing of tenant requests for permission to sublet, vary lease terms, alter the premises, assign leases, vacate the premises
tenant monitoring and lisison
administration and delivery of services required under the terms of the lease contract e.g. provision of utilities, insurance, cleaning, security, maintenance
Geltner (2003) proposed that the relative performance of RE investment portfolios can be analysed as being determined by decision regarding strategic allocation between sectors and regions, lots sizes etc. the stock selection of individual assets, expertise in transaction execution and the operational management of the assets being held
Transaction Cost Economic Perspective:
Transaction Frequency - high
Uncertainty - low
Asset Specificity - low
stresses the internal resources of the firm as the main determinant of firm performance
To justify internalisation, the internal resource should have: the capacity to add value, scarce and difficult to replicate, the firm should be capable of using the resource effectively
Operational Costs are dependent on the benefit of the third party provider from economies of scale
Rationales for using 3rd party providers
Rationales for using 3rd party providers:
access to deep and specialist knowledge
improved quality assurance and accountability
Associated externalised operational risk reduction
Conversion of fixed to variable costs
Perceived Advantages and Disadvantages of Outsourcing:
ability to head count in the company low
fixed costs to variable costs
ability to focus on the competencies in the organisation
possibility to focus on core business
investors can engage in tactical asset allocation with the RE portfolio and between RE and other asset classes without incurring the costs associated with resourcing additional property management , having surplus or having PMs with insufficient skill sets
flexibility to restructure
in house - must select assets based on PMs ability, outsourced - responsibility of competent manager transferred
disposals: in-house - hard to terminate contract. outsource - easier to terminate contract with external service provider
Improved quality - possibility to appoint the 3rd party PM most capable of managing each specific asset
Arms length relationship in terms of performance management + Service Quality - easier to intervene
3rd party property managers able to follow developments in PM more proactively and in-source innovations
'Poaching' or Information leaking
3rd party gain all the key contacts with the tenants and the best understanding of the market and your properties
Heavy turnover of key personnel in outsourcing projects common concern - additional costs to clients
interconnected problems related to quality of workforce, remuneration, low profit margins, high levels of staff turnover and over extended staff
difficult to find skilled and motivated property managers, and to incentivise them to work proactively with the assets
Shi (2007) - in business process outsourcing the client firm can also run the risk of having fewer innocations after sheding eh control over critical assets, customer info. or losing innovation capabilities . Also - 3rd party provided isn't incentivised appropriately to invest in innovation
reduced control and lack of transparency in quality control
loss of flexibility in what the PM actually does
loss of control of the workload model
Which management systems are used? Investors systems - retain control of data and lower risk of supplier 'lock in'
Trend to use 3-5 outsourcing companies
Corporate Real Estate Asset Management (Strategy and Implementation) by BP Haynes and N Nunnington, 2010 EG Books