Experts agree that the future of the commercial real estate market belongs to management companies, as the strategies implemented to manage a facility directly determine its profitability. Not wanting to fall behind, regions in the Urals have established a management company market for both major national projects and regional authorities. However, as of now, a tradition of management companies has not been established at the local level. Accordingly, there are many issues to resolve locally, including whether a management company should adhere to a standard method of management based on the market sector or customize their strategy to the specifics of a facility.

Market players believe that commercial real estate management in the Urals is still at the beginning stages of development. “Many owners still do not understand the importance of hiring professionals to manage property,” notes Alexei Karavaev, chairman of the non-profit partnership of management companies and developers. “Very often, a department is formed as part of a construction or financial structure, and the department handles the management of the real estate. It then becomes necessary to approach an outside agency when the owner realizes that the facility is not being managed properly or when the owner is actively diversifying his business and lacks the resources for the labor-intensive management process. When it comes to choosing a management company, the owner approaches the firm from the position of ‘minimal risk with maximum profit.’”

According to Karavaev, the owner often requires that the management company provide a steady profit (from the owner’s point of view), but such that all risks are assumed by the management company, not the owner.

At the same time, a number of companies and representatives of regional authorities have realized that professional management guarantees a successful business. According to Vera Soloveva, minister of trade, food and services of the Sverdlovsk Region, many owners do not think about urban planning, particularly when it comes to shopping centers. To correct this, a management company with experience operating several facilities can draw an owner’s attention to many typical errors committed during the completion of a project.

What do owners require of management companies today? “The most important requirement of any owner is that the management company generates the highest possible profits from the facility,” says Elena Zharkova, deputy general director for sales and promotion at Competent Trust Management (CTM). “And only a professional company can provide this. There are two main criteria to consider when choosing a management company. First of all, the company should have already been on the market for an extended period of time, which is a difficult condition to fulfill, given that facility management, as a separate business, appeared in Russia relatively recently. Secondly, they should be experienced in managing real estate facilities and have personnel with specialized education and/or training in the area of real estate management.”

Dmitry Stepanenko, vice president of Heliopark Group, believes that the main requirement of any owner in any region is an increase in profitability, improvement in financial results, a rise in the capitalization of a facility as part of the technological work of the company and a higher level of quality service, whether it is an office building, a shopping center or a hotel complex. The Urals region is not an exception.

“When selecting a management company for a business center, owners consider the personnel and the quality of the services as well as the appropriate remuneration for the services,” notes Viktor Lebedev, general director at Energoinvest development company. “Accordingly, the fundamental criteria for selection are the price/quality ratio, experience and reputation of the management company, recommendations and practical examples. Indeed, we were guided by these criteria when selecting a management company for our Slavyansky Business House and Petrovsky Business House facilities, respectively.”

Specific Features of a Region

Experience shows that regional owners thus far do not fully trust management companies. “In most cases, a management company is handed the responsibility of technical servicing of a facility via outsourcing and maintenance of it. Administrative responsibility is also entrusted, but less often,” says Karavaev. “However, regional owners are wary of relinquishing control over financial flows. The issue of trust is simpler for management companies that formed from the construction or financial structures of the owners. For example, Sistema management company, which operates the Sibersky Trakt shopping complex, performs a full spectrum of facility management services for the owner, including financial management.”

However, not all management companies are capable of fulfilling all the services professionally. In addition, many market players and business owners do not have a full understanding of professional management. For example, some believe that the management of a facility involves only the direct operation of the building itself, such as cleaning, maintenance, safety, etc. Such market players do not realize that the professional management should primarily involve the operation of a facility as a business that must generate a profit. Accordingly, professional management also involves the control of financial flows, including asset management, and not just maintenance of the facilities.

“An owner must aim for the optimization of profits from the operation of a facility and can assign this task to a professional manager who operates the facility inside and out,” says Zharkova. “However, unfortunately, not all market participants are ready to transfer their business to a full management cycle. Accordingly, so-called ‘management’ often involves the technical operation of the facility.”

As a result, the service – a management company working at a facility – is in demand on the market. The rise of this service is the result of owners’ unwillingness to turn over their businesses (even partly) to another party. By using this service, the owner receives professional consultation on real estate management. Additionally, this service is useful for larger companies that own several facilities, as they can study the management technology at one of the facilities, thus gaining an idea of how this process should be applied at the other facilities.

“When our first facility, Slavyansky Business House, was delivered to the market, we were set to hand over practically all the facility management functions to an outside management company. This was the logical solution of the new format for Chelyabinsk,” says Lebedev. “We preferred a management company from Moscow or St. Petersburg with good experience managing an elite facility. At that time, there were not any companies like this in Chelyabinsk, and all operating business centers were managed in-house or by local companies. However, a small regional project did not interest professional management companies in Moscow and St. Petersburg. Therefore, we made the necessary decision to create our own service.”

According to Lebedev, taking into consideration that the company’s facilities are not independent buildings but complexes of inter-connected and complimentary buildings, specialists constantly have to make decisions on improving the management quality of facilities. “We shall open the Pavlovsky Business House in 2007, and today we are once again negotiating the outsourcing of management. Under the current conditions, we are ready to hand over to a management company all functions associated with the technical servicing of the building, the maintenance of all systems in working order and routine maintenance, as well as cleaning and administrative duties. This will improve the level of service in the facility. Furthermore, we will be able to reallocate our resources to our original strengths of development, design and the construction of new facilities,” notes Lebedev.

“The majority of well-known management companies usually assume full or partial financial management of the facilities entrusted to them,” notes Zharkova. “However, the owner or the investor, as a rule, retains the final say in financial results and decisions on investing monetary funds. This is partly due to the engrained ‘Soviet’ mentality, the result of which people fear handing over the ‘reigns of government’ and prefer to resolve financial matters privately and not trust anyone else.”

“There are examples of the use of management firms in Chelyabinsk, but they are unique,” says Lebedev. “For the most part, owners prefer to resolve financial matters themselves. I think it is only a matter of time, at a definite stage of market development, that owners will feel confident enough to trust the full spectrum of matters to management companies.”

Specific Features of a Facility

The question remains as to whether a management company can use universal and standard management strategies for all facilities in one segment of the market, such as the office segment, or must each facility be individually catered to. According to Zharkova, “There is not any universal technology, as very seldom are there standard real estate facilities. Office buildings could differ from one another simply in terms of space. Even if general features stay the same, the details change. This can also be said of foreign experience, as one can see on the market the blind application of Western technology for managing facilities. In general, the foreign method of management is unquestionably very useful, but it must be adapted to a specific facility and, in particular, to Russian conditions. As such, the management approach is individual and should be customized to a particular real estate facility. Blind application of management technology could cause inefficient operation.”

“Everything that has not been standardized is ‘trial and error.’ We have gone through this ourselves, and we could say that such an approach results in only additional expenses. An individual approach to managing every facility may be interesting for the management company in terms of experience, but for the owner of the facility, these are unsubstantiated expenditures,” believes Lebedev. “In our opinion, the professionalism of a management company is determined by the selection of key strategies at varying management stages of a facility, and these procedures have been developed through experience and they are tried and true. This is what the economic and practical advantage is.”

Hotel operators, whose exact business it is to manage facilities, offer a different point of view. “Technology is the basis of hotel management,” reckons Stepanenko. “However, an intelligent and experienced management company is always able to approach a hotel facility individually, taking into consideration the features of the hotel and the region overall, and not contradict the established standards of the chain. Cumulatively, these two building blocks, operating standards and individual features, result in achieving the best results.”

Competition with Nationals

“The arrival of Moscow and foreign companies concerns businessmen on many local markets,” believes Karavaev. “On one hand, the economic processes which formed the management company market began sooner there, and, correspondingly, these companies have more experience. On the other hand, these same companies do not know the specifics of the local markets and often underestimate the level of development of business in the regions. But, most importantly, they do not have the established contacts with the authorities, and this complicates their activity. Additionally, a Moscow management company that comes to a region is most likely hire locals, thus practically neutralizing the advantage of experience.”

According to Karavaev, there is no tangible competition at the management company level, as it is premature to talk about outsourcing when demand for professional management companies has not formed yet.

Zharkova partly shares this point of view: “On one hand, Moscow or foreign management companies have the indisputable advantage over local players. They have experience managing facilities, established means for attracting tenants and concluding lease contracts, and are constantly improving their operations (services, prices and technology), allowing them to use the latest methods and technology in the management of facilities. However, with Moscow or foreign management companies, there is also the risk that they would use their standard technology and approaches, thus possibly endangering the uniqueness of the facility.”