Standardizing the services of management companies has been a topic of discussion for some time now at professional conferences and forums and in the specialized mass media. However, the issue has been spinning in its tracks, with the likely culprits being a young management market, demand dominating supply and the lack of a legal foundation. Nevertheless, specialists still have hope that the management market will become more advanced, and they are even set to initiate a program for developing set standards for management companies. What is standardization, who needs it and why?

The Russian real estate market thus far has not established exactly what a management company entails and what services it should render. Indeed, one management company could be responsible for only technical operations, another could offer services for lease arrangements, while a third may even handle construction management. Moreover, the various management companies also charge different rates for services rendered, and there is not a single approach to budgeting. Finally, there is not a single quality standard according to which a tenant could objectively determine whether the service is satisfactory.

“The main goal in creating standards for management companies would be establishing a clear and concise set of quality services and criteria understood by everyone,” says Vladimir Yadykin, director at Becar Commercial Property St Petersburg. “Today these standards do not exist on the Russian market, with each management company offering clients – business or shopping center owners – its own selection of services. The company could differ considerably in both content and quality, thus naturally resulting in a difference in costs.”

Who needs standardized management company services and why? Specialists are certain that single standards would assist in establishing a more advanced real estate market overall; therefore, the standards are needed by owners, tenants and management companies.

“Standardization will allow owners and tenants to make the correct choice, decrease staff expenditures in one’s own administrative departments, determine what quality of service will be delivered as well as how to optimize finances. Healthy competition between various management company players will require monitoring the operations of one’s competitor and raising one’s level of service to a new level,” believes Alexsei Savenkov, director of the technical department at Fragra management company.

Anna Tsirulskaya, commercial director at Slavgrad, shares the same opinion: “A tenant requires services corresponding to the building’s class and the specific business of the tenant. The owner has another task, which is receiving stable lease payments. A management company must regulate the relations between an owner and a tenant, and standardizing a facility’s management services is the company’s work criteria.”

“I believe that commercial real estate owners are the ones most in need of standardized services from management companies. Once owners have seen a full list of standardized services rendered by management companies, most of them will no longer set up their own management companies,” reasons Yuri Borisov, president of the Guild of Managers and Developers and managing partner at IB Group.

The presence of single management quality standards would develop the purchase and sales market for ready-made facilities. Today it is known that this market is only in the beginning stages, yet foreign investment funds are ready to infuse significant amounts of money in delivered real estate. Meanwhile, the sale of facilities fully occupied by tenants so far is not widespread.

“The low number of purchase and sales deals of delivered businesses attests to existing problems on the market deterring investors,” says Yadykin. “Foreign investors require a commercial real estate facility to have transparent deals, quality tenants, long-term lease agreements, a division between lease and operating financial flows as well as the presence of a professional management company. To date, deals on the Russian market are completed only with facilities operated by Western companies. Thus far, it is not possible to demonstrate to foreign investors the professionalism of Russian management companies without single quality standards, and these standards simply do not exist.”

What Does it Entail Exactly?

So, which services rendered by management companies are worth including in a single standard? Foremost, according to market players, services which deal specifically with real estate management, as well as procedures and methods governing management companies, must be affixed to a standardized list of said services.

“These are methods for calculating the cost of services, namely variants which could be applied to various real estate facilities, depending on their designation, lease agreements for these facilities, etc,” says Evgenia Vlasova, general director at Sawatzky Property Management. “The fundamental approach to individual aspects of operation must be standardized, for example, maintenance of utilities and technical equipment, scheduled preventive maintenance, etc.”

Budgeting is also an important aspect in standardization. According to specialists, how a budget is formed for regulating the interrelations between a management company and an owner, the budget specifics regulating the relations between an owner and a tenant and how a management company operates with each of these areas should also be included as part of standardization.

“Management companies must be required to have experience, render a specific set of services, have insurance, sign contracts, maintain set numbers of personnel, hire only qualified contractors, use an approved information system, etc,” says Victor Ilin, senior engineer at M+W Zander Facility Management CIS.

The management market in St. Petersburg has made an interesting attempt to standardize management company services. Indeed, when developing the law on trust management in the city, the following requirements were presented to permit management companies to operate facilities via trust management:

• at least two years in operation

• at least two facilities under management

• at least 5,000 sqm

• property insurance for management

• no debts owed to the city’s budget

Real estate specialists believe that these requirements are difficult to classify as standardization, given that this is simply the first attempt at establishing some sort of order to the market for management companies. “I have definite doubts concerning these requirements. First of all, the two-year limit on experience is extremely low, given that a management company in this time could not have handled all tasks in a cycle which arise during the activity of even one facility. Also, the requirement for managing at least two facilities (at least 5,000 sqm) causes doubt, as this amount of square meters is indicative of a newly functioning management company. In terms of insurance, all management companies should carry property insurance, but, in addition, they must be required to carry third-party liability insurance. I believe that another requirement worth adding is having professional training and education in real estate management,” says Vlasova.

“These criteria do not reflect the service quality level and do not provide information on professional training and education and preparation and experience of a company’s specialists. The criteria only monitor a number of limitations for new players on the market,” says Tsirulaskaya.

The proposed requirements differ strikingly from those required by Western associations, such as the Institute of Real Estate Management (IREM). Indeed, IREM has single standards for managerial and financial stability, insuring clients’ assets, personnel education and training as well as a single code of ethics for companies and association members and, most importantly, practical activity standards. Although Western experience cannot simply be blindly applied to Russian conditions, it is worth taking into consideration what the West has accomplished when forming the requirements for management companies in Russia, given that the West has already developed varying standards which could be adapted to Russia’s technology.

For example, key performance indicators (KPI) have already been set and work extremely well, such as means for increasing service quality used by owners and tenants in the West. Depending on the KPI, money is either added or deducted to a management contract on a percentage basis, and in the West, management companies’ service contracts are written in greater detail in terms of the level of service required for each area and responsibility for services rendered. Moreover, there is information gathered and maintained in a so-called black book on companies which do not maintain a high level of service, which in itself is an excellent reason for management companies to provide a quality product.

“The whims of a tenant are no way to gauge the quality of service, as this is very subjective. A detailed list of management services must be set and adherence to it must be checked for an objective measure of quality. For example, there is a system in the West of independent experts, facility-management professionals who check for adherence to service standards and corresponding contracts. The market needs an independent system, and there is a trend in this direction,” says Eduard Aspit, general director at FACILICOM management company.

The services rendered by management companies in the West have long been standardized, partly as a result of development, given that the market there is already 50-years-old, and partly as a result of the efforts of professional organizations like IREM, BOMA, etc. In terms of Russia, there is neither one of these regulatory features. First of all, the professional management market in Russia is only 15-years-old. Secondly, professional trade guilds are poorly developed, and it is namely these unions, according most specialists, which must be the main players in establishing standards for management companies.

“Nongovernmental professional associations could initiate establishing standards for management companies; however, there are not any similar associations with global-organization status on the Russian market today,” says Ilin. “On the other hand, the management companies themselves could establish the standards, but I believe the market has not matured to the point when companies will openly speak about their experience and share it with others; thereby, without this aspect, it is not possible to establish a joint product,” says Vlasova. “On the other hand, brokerage companies could establish the standards, as they have the most information on the real estate market and they know firsthand about the problems of there not being standardized management company services.”

Moreover, the government could adequately contribute to establishing single standards. Indeed, laws concerning management today are so basic that it is difficult to say that the state offers any support whatsoever. An illustration of this is that in Russia there is still not a licensing body for real estate management, with only very narrow fields of management being licensed, such as technical maintenance. So, how could the government assist?

First of all, the state could set up a licensing body. Secondly, the government could support the creation of professional associations and assist in their activity. “Naturally, nongovernmental public associations should initiate establishing quality standards and selection of services. The state should legalize the existent of these associations and render them information and material assistance for developing and setting and approving said standards,” says Tsirulskaya.

“Typically, legislation always lags development on a given market. Legislation should include financial requirements for companies, given that management companies assume serious risks and must always have their own resources to compensate at least partially for possible damages. However, thus far the market itself determines and sets the requirements,” says Aspit. “Management standards must be directly set at the professional association level, given that these aspects are usually not registered legislatively.”

Conclusion

Currently, several management companies are undergoing the process of being certified according to ISO 9000 standards. “Many real estate owners base their selection of a management company on the said company being certified in accordance with ISO international standards,” says Alexei Egorshev, deputy director of the technical department at Fragra.

ISO clearly regulates issues of quality control, but this not only concerns service companies, but also, production, IT, etc. Establishing set standards on the management market would render the real estate segment more professional and competitive.

Under what conditions could standardized management company services become the norm and when could this occur?

A seller’s market pervades to date, with tenants standing in line. Accordingly, owners virtually only pay lip service to management services, neither demanding high-quality nor strict budgeting from management companies. In other words, owners are satisfied with the status quo. Correspondingly, there is no incentive for management companies to practice self discipline and adhere to single standards. Nevertheless, as soon as the real estate market stabilizes and facilities begin competing with one another for clientele, management issues will become pertinent. Consequently, owners, in the interest of optimizing the business process, will demand quality standards, budgeting, etc. from management companies.

“Standardization will take place in 2008-2009, once a balance between supply and demand has been attained as the result of a large amount of premises being delivered to the market. Consequently, tenants will be more fastidious in their selection process, which, in turn, will ultimately result in establishing management standards,” says Tsirulskaya.

However, Vlasova is a bit less optimistic: “I believe that a body setting standards could only appear in five to ten years. During this time, the issue of licensing may be resolved, while matters on establishing quality standards could be developed, and so on.”

The specialists at M+W Zander Facility Management CIS agree with this view. “Standardized management company services will only be the norm when 80% of all real estate uses the services of professional management companies, including real estate belonging to governmental agencies., This process will most likely begin developing no sooner than in five years,” concludes Ilin.