Risky property business takes skills

By COLIN TAYLOR

Investing in commercial property generally returns higher income than investing in residential property, but the fear of the unknown is daunting.

After all, everyone knows what is involved with running a rented house, flat or apartment, because we all live in them.

But the requirements of owning and leasing offices, shops or industrial buildings are different.

Enter the professional manager.

"The commercial property manager does everything a landlord should do to run a commercial property," explains the managing director of Commercial Property Managers, Steve Sampson.

Someone buying a single-tenanted shop or other small commercial property does not necessarily need this support, he says.

"If they're astute enough to make an investment and have a good practical understanding of economics or accounting, the average investor/owner can successfully run a commercial property as long as they're prepared to seek professional advice on specialised issues like valuations and legal matters."

But when the investor becomes involved in more complicated commercial properties that are multi-tenanted or which place the onus on the landlord to provide essential services, that is when a commercial property management should be sought.

John Crocker, director of property management for Bayleys, believes any investor going into commercial property without experience would be wise to seek professional advice.

"Your exposure to heavy fines and risks in commercial property management is much greater than in residential," he says.

"When it comes to houses, flats and apartments, the Residential Tenancies Act is pretty much what it's all about. But with commercial property you've got a whole raft of laws and regulations: warrants of fitness for the buildings, health and safety issues and a number of statutory requirements under a variety of acts."

Crocker says it is true that one of the attractions in commercial property ownership is that the tenants pay for most of the maintenance costs. But this does not mean the tenant has to organise the essential work.

Service contracts need to be in place and kept up for a host of things such as the regular maintenance of lifts and escalators; air conditioning, heating, security, fire alarm and sprinkler systems; window cleaning and so forth.

These contracts vary in complexity depending on the nature, use and location of the building.

"Somebody has to make sure all of these things are maintained to comply with strict regulations and all of these things require level of expertise to handle," Crocker says.

"Failure to comply comes back on the owner of the building, not on the tenant."

Added to this is the day-to-day management of the buildings, collecting rent, hiring tradespeople, paying bills, advertising vacancies, ensuring lease renewals are notified on time, negotiating and renewing the leases, making sure operating expense budgets are done for the following year and so on.

Crocker also says there is a vast difference between dealing with residential and commercial tenants.

"There's a different mind-set in terms of the tenants who are businesspeople. All the emotion goes out of the relationship and hard-headed business attitudes drive it."

J ohn Dunn, national director of management services for Jones Lang LaSalle, describes commercial property management as a more dynamic commodity when compared with the residential sector.

"It's far more alive and keenly influenced by making the right or wrong strategic decisions."



The skills involve not just the day-to-day running of commercial properties, but judging when to spend money on capital improvements and when not to; how to maximising advantages to the owners in conjunction with rent reviews and taking into account the property life-cycle.

Improvements to residential property often involve relatively simple decisions on repainting or recarpeting. But with commercial property, the work could involve upgrading the elevators or the air-conditioning systems, installing an access control system, upgrading electronic security and other costly improvements.

There is no textbook covering the situations for all commercial properties. Every property is different and must be managed on its own merits.

"The trick is not spending the client's money too quickly, but taking the opportunity to do so as systems and facilities become outdated, or to ensure the continued leasing of the property," Dunn explains.

"It's a matter of planning and timing of necessary works in conjunction with having the necessary flow of capital to maximise the rental and achieve the best advantages for both the owner and the tenant."

This means a good commercial property manager needs skills covering real estate, finance, law, administration and technology to ensure the maintenance of essential services and enhance the property.

An integrated mall would also require marketing skills.

Sampson says commercial property management is essentially a service industry.

"It's a service to the tenants as well as to the landlords, and some people forget that. But it's the service the tenant is paying for as well as the building space, and why they stay instead of moving on."

Each property has to be treated as an individual business unit that needs to be kept fine-tuned to make it work efficiently for the benefit of both the investor and tenants.

Crocker says prudent management also adds value to a property.



This may mean a lift upgrade, foyer refurbishing, repainting or other major work. The property manager makes recommendations, obtains quotes, and co-ordinates architects, designers and contractors to get the work done.

Dunn says the level of skill required to increase the capital value of a commercial property or undertake asset management should not be under-rated.

"You can overcapitalise an office building the same as you can overcapitalise a house," he says.

"It's a matter of judging whether capital improvements will be justified in terms of increased rental returns.

"It's also deciding when to spend money on preventive maintenance and weighing these costs against the long-term future of the building."

Dunn says property managers also need to be able to advise their clients about market developments or unforeseen circumstances.

For example, what if a new office building or block of shops is approved for construction near a client's building?

It's not just a matter of encouraging the client to spend lots of money. His or her older building has to be positioned to compete with the new one.

Property managers should know how to achieve the maximum return for any particular property in any one of a number of given situations.







The range of skills required also includes feasibility studies and cost-benefit analyses that may result in a property manager advising a client that it is time to sell the property and acquire another in an area that has more potential.

Because property is a cyclical investment, commercial property managers need to draw on all their knowledge and experience to help clients get through the downturns and take advantage of the upturns in the market.

Their clients include family trusts, public and private companies, registered societies, overseas investors and individuals.

Some commercial property managers "guesstimate" their fees at about 2 to 4 per cent of the rental income minus operating expenses. Most say they now negotiate individual contracts.