Updated: 24th March 2009

Moving Beyond the Basics of Property Management The Strategic/Asset Management Offerings in MDA Property Manager © Synopsis Asset Management is an essential element of comprehensive Property Management. Without efficient Rent Collection and Property Administration, there cannot be effective Asset Management. But what exactly is property asset management? This paper tries to demystify the business of property asset management by giving some practical examples of the issues that are considered. It makes specific references to the functionality in MDA Property Manager© that support the asset management processes.

General Definitions It is generally agreed that Property Management covers three main aspects: Rent Collection, General Administration and Asset Management. These aspects are inter-related and cannot exist without each other. In a nutshell: 

Rent Collection covers the billing of right amounts at the right time in terms of lease agreements and the physical collection thereof.

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General Administration normally includes the Rent Collection function, but extends to the physical management of the property and related services to ensure delivery of satisfactorily tenanted space. Accurate accounting or bookkeeping is therefore part of this function.

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Asset Management focuses on the strategic issues of optimizing returns on investments. The decisions are of a tactical nature and often have a risk minimization angle.

Marketing Speak These are examples taken from the promotional material of some well-known South African property companies: 

“ We believe that the hallmark of our asset management service, is pro-activity. This is possible through combining a systematic approach to portfolio planning with objective investment research. Our highly experienced team conducts ongoing investigations of potential opportunities to add value to portfolios. This ensures that growth points are constantly identified to ensure optimal returns and to increase the income earning potential and future performance of the underlying asset.” (Company A)

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“ We take a hard-nosed approach to our property investment portfolios and insist that our properties show attractive returns in the context of the broader investment market. To achieve this we conduct ongoing analysis of the performance trends of the individual buildings and their contribution to the portfolio. This indicates when and where we must take action to improve performance, redevelop, trade out under1

performing buildings and how best to add value or generate additional income from the portfolio.” (Company B) 

“being in the right asset, in the right location, for the right length of time, so as to ensure maximum value added through effective strategic management.” (Company C)

Asset management is therefore largely about finding and exploiting opportunities and at the same time assessing and creating strategies to reduce risk. How is this all achieved? The following describes firstly, the business processes surrounding the delivery of asset management services, and secondly, it gives some practical examples of the types of analyses that need to be done to support these processes.

Asset Management Processes The business processes that make up the asset management activity include: 

The development, implementation and monitoring of a strategic/business plan for each property in the portfolio.

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Knowing and continually researching the general economic environment and, in particular, the micro and macro property cycles.

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Monitoring the property manager against benchmarks so as to ensure that feasibilities in fact become reality.

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The supervision of regular valuations by qualified and appropriately experienced professionals.

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The management of the sales and acquisition process which includes broker liaison, the preparation of feasibilities, negotiations, the actual transfer of the property and a proper hand over of all documentation.

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Ensuring that tax depreciation and other allowances in terms of prevailing laws are claimed.

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The development and implementation of a policy to fund long term preventative maintenance and capital replacement expenditure.

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The evaluation of capital expenditure proposals.

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The management of the accounting and secretarial function.

A Quick Check on the Basics * Note that items in this Font refer to actual forms or reports in MDA Property Manager©. Before getting carried away by the cerebral stuff that defines strategic thinking, it is appropriate to do a quick check of the underlying data required to support sound decision-making. The following reports typically give a good snap-shot of the „health‟ of data: 

Tenancy Schedule: A summary of pertinent lease details at a point in time. Ensure that typical recoveries like electricity, water, rates increases etc. are listed and properly defined. Ensure that the accommodation types and rentable units intuitively describe the property and that occupancy and vacancy details are correct.

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Lease Check List: Ensure that leases are complete and legally secure.

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Credit Control Listings: Ensure that late payment interest and penalties, as well as enforceable debit order collections are being used effectively.

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Recovery Exceptions: Cross-check leases for specific recovery types and highlight those tenants that do or do not have an associated charge for a selected period.

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Income Statements: The multi-period view with budget or revised budget options will show whether

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forward planning has been done, and also how well budgets have been done historically.

Some Practical Examples The following are examples of some of the „real‟ analysis that can be done to support the asset management process: 1. Inherent Potential Scan the various Property Details reports for indications of inherent potential in terms of available bulk, efficiency ratios etc. a. Town Planning Review opportunities or constraints by virtue of zoning, height restrictions, building lines, servitudes, coverage, floor area ratio etc. b. Efficiency Ratios A property will rarely perform well in the long term if its ratio of gross construction to rentable area is too high. Likewise, tenants in properties with high rentable to usable area ratios eventually move on to more efficient – and hence more cost-effective space. Try as one may, if these ratios are high, no asset manager will be able to achieve exceptional performance on these properties.

2. Key Performance Indicators a. Credit Control Arrears Trends Period

Arrears B/f

Rent

Recoveries and Adjs

Total Due

Receipts

Arrears C/f

%Arrears on New Billings

%Arrears on Total Due

2001/01

10,000

100,000

15,000

125,000

-100,000

25,000

21.74

20.00

2001/02

25,000

100,000

15,000

140,000

-100,000

40,000

34.78

25.00

2001/03

40,000

100,000

15,000

155,000

-120,000

35,000

30.43

22.58

Arrears trends show the magnitude of the arrears problem over time. It is sometimes meaningful to distinguish between the arrears as a percentage of new billings and of total due. Age Analysis Period

Total

2001/01

25,000

2001/02

40,000

2001/03

35,000

120+ Days

90 Days

5,000

60 Days

30 Days

Current

10,000

15,000

10,000

15,000

15,000

15,000

15,000

0

The Age Analysis gives an indication of the severity of arrears. The likelihood of collecting amounts in the older columns reduces with time. 3

It is useful to be able to get these figures on a portfolio level and then to drill-down to the underlying property and ultimately, the tenant balances. See report KPI Credit Control.

b. Space & Lease Management Expiring Leases Property

Total Rentable Area

Expiring Area

% Expiry by Area

Total Current Contractual Rental

Total Current Market Rental

Expiring Contractual Rental

% Expiry of Total Contractual Rental

% Expiry of Total Market Rental

Property 1

1,000

100

10.00

25,000

30,000

2,500

10.00

8.33

Property 2

2,000

2,000

100.00

20,000

15,000

20,000

100.00

133.33

3,000

2,100

70.00

45,000

45,000

22,500

50.00

50.00

Total Rentable Area

New Area

% New by Area

Total Current Contractual Rental

Total Current Market Rental

New Contractual Rental

% New of Total Contractual Rental

% New of Total Market Rental

Property 1

1,000

100

10.00

25,000

30,000

3,000

12.00

10.00

Property 2

2,000

1,000

50.00

20,000

15,000

7,500

37.50

50.00

3,000

1,100

36.67

45,000

45,000

10,500

23.33

23.33

New Leases Property

This analysis should be done for different date ranges. It has limited value if not analysed within the context of prevailing market conditions. It is useful to be able to get these figures on a property level and then to drill-down to the underlying tenant figures. Other The other key performance indicators under KPI Space and Lease Management would be a summary of „hot‟ prospective tenants and also a list of unsigned/incomplete lease agreements.

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Other reports in the Space and Lease Mangement category include:

KPI Occupancy Analysis: Analyse changes in rentable area, occupancy, vacancy and rental rates over time. Display the information graphically and/or in tabular format on the same report. Analyse amounts by amount or by percentage.

Tenant Retention and Letting Activity: Analyse the effectiveness of tenant retention and new letting endeavours. This report shows gross area and rentals achieved for new leases and renewals, areas vacated over a period of time as well as what remains vacant at the end of the period under consideration.

Area and Occupancy Movements: Analyse changes in portfolios with respect to: 1. Rentable areas as a result of acquisitions and disposals of properties 2. Vacancies as a result of tenants vacating and new leases being concluded.

c.

Maintenance Management Trends need to be established of costly maintenance or other requests and their effective resolution. Since day-to-day operational management can generate huge volumes of activities, the asset manager needs powerful query tools to take various „snap shots‟ from different angles i.e. date ranges logged and completion due, priority, completion status, cost exceeding a specified amount, region, portfolio etc. See reports Monitor Jobs and KPI Facilities Management.

d. Expenses and Recoveries A cross-referencing system needs to be established between Expenses and their associated Recoveries from Tenants. The asset manager needs to be able to analyse the ratio and variances between expenses and recoveries over designated time periods. It is useful to be able to get these figures on a property level and then to drill-down to the underlying tenant figures. See reports Expenses and Recoveries and Recovery Exceptions.

e. Turnover Analysis For retail-type properties, it is essential to be able to record trading turnover history and also ensure that turnover-based rental is timeously collected. Asset managers need to analyse trading densities i.e. gross turnover expressed as a rate per unit of 5

area. This needs to be done for different categories of business, for different floor area ranges, for different parts of the complex – all within the context of accepted benchmarks and seasonal fluctuations. See reports KPI Turnover Trend Analysis and KPI Turnover by Trading Area Analysis.

3. New Business Opportunities Property Administrators and Rent Collectors often get bogged down by detail and hence forget to look for new business opportunities within their portfolios. A discipline of maintaining simple lists of opportunities inherent in the different role-players that comprise the market may ensure that the revenue generating potential of properties is well exploited in the long term. The role-players are: 

Prospective tenants.

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The oft-overlooked existing tenants.

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Property owners/investors.

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The broking community.

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The opportunities inherent in properties themselves e.g. refurbishment, extension, re-development etc.

See forms Prospective Tenants, Existing Tenant Opportunities, Property Opportunities, and Owner Opportunities and reports Prospective Tenants List and Brokers Schedule.

4. Valuations & Investment Analysis a. Investment Spread Analysis Property

Acquired Date

Rentable

Gross

%Gross

Net

% Net

Book

%Total

%Return

Market

%Total

Area

Income

Income

Income

Income

Value

Investment

on Book

Value

Market

on

Value

(‘000)

Value

Market

(‘000)

(‘000)

(‘000)

%Return

Value Property1

1/1998

1,000

345

55.56

300

62.50

2,500

51.02

12.00

3,600

66.67

8.33

Property2

4/2000

2,000

276

44.44

180

37.50

2,400

48.98

7.50

1,800

33.33

10.00

3,000

621

100.00

480

100.00

4,900

100.00

9.80

5,400

100.00

8.89

If the individual properties‟ relative contributions to the portfolio are very different, then some opportunity or risk may be indicated. It is typically easier to look at a graphical representation: Contribution By Property 100 80 60 40 20 0 %Gross Income

Property 1

% Investment

Property 2

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The next obvious angle is sectoral analysis i.e. various combinations of floor areas, returns, values, lease expiry profiles, vacancies etc. in different geographic areas or usage types. For example:

Geographical Spread - By Floor Area

3%

3% 4%

Gauteng

9%

Western Cape Kwazulu Natal 81%

Free State Other

See report Investment Spread Analysis. b. Lease Expiry Profile Probably the most important indicator of risk is the lease expiry profile. There are multiple variables to this analysis i.e. by Rent and Area Amounts, by Rent and Area Percentages, for different time segments (years, half-years, quarters or months), for different geographic areas, usage types, portfolios etc. Again, it is useful to be able to get these figures on a portfolio level and then to drill-down to the underlying properties and ultimately the tenant figures.

Lease Expiry Profile 30 25

By Rental %

20 15 10

By Area %

5 0 Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

See report Lease Expiry Profile.

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c.

Portfolio Vacancy Analysis This analysis will assist in quantifying the „loss of opportunity‟ as a result of having vacant space. It can also be done sectorally so as to identify the properties needing most attention. Property

Total Rentable Area

Vacant Area

Vacancy %

Total Monthly Contractual Rental

Total Monthly Market Rental

Opportunity Cost

Opportunity %

Property 1

1,000

100

10.00

25,000

30,000

5,000

20.00

Property 2

2,000

2,000

100.00

20,000

15,000

-5,000

-25.00

3,000

2,100

70.00

45,000

45,000

0

0

See report Portfolio Vacancy Analysis.

d. Valuations Valuations can involve a tremendous number of computations and inevitably result in considerable debate. The unique benefit of MDA Property Analyst© is that it generates values based on several different valuation methods. In one pass it will show values determined by Capitalisation of 1st Year‟s Contractual Income, Capitalisation of 1st Year‟s Income as if Fully Let at Market Rentals, General Discounted Cash Flow, Top Slice Discounted Cash Flow, Opportunity Cash Flow, Depreciated Replacement Cost, Book Value and Local Authority Value. If these values differ significantly, then some further analysis will inevitably be required. One of the most useful outcomes of such a valuation exercise is a graph of Total Returns i.e. Income Yield + Capital Growth:

Total Investment Returns 50 40 30 20 10 0 -10 -20 -30 -40 Year 1

Year 3 Capital Growth %

Year 5

Year 7

Year 9

Income Yield %

The above example shows a simple single-tenanted property, where the lease expires in year 9. Current rental is R25.00/m² escalating at 12%, whereas market rental is R20.00/m² with projected escalations of 10%. Major expenditure of a one-off nature is expected in year 2. It will obviously be a good idea to sell the property well before year 9.

e. Effects of Gearing One of the simplest tools that asset managers can employ to boost performance, is to gear the investment. Unfortunately the exercise requires a number of computations, which are not feasible without a sophisticated tool. 8

Conclusion Hopefully this paper has given some insight into the starting points for work done by asset managers. It is clear that the amount of information processing and computations required for this kind of analysis make it imperative to have the support of a solid property management system.

This paper is adapted from an article first published in the S A Property Review – May 2001. The original article then formed the basis for the chapter on Asset Management in the series of educational books produced by Prof Chris Cloete for Sapoa.

Author: Deon Keet BSc BCom is a director of MDA Property Systems – developers of premier property management systems. Visit them at www.mdapropsys.com

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