In the world of Russian commerical real estate, a management company is a strange and misunderstood concept, as it contradicts the prevailing view that one should keep “one’s own shirt nearest to one’s skin.” Many still believe that a property should be managed by its owner and no one else. However, leading players in the Russian real estate market are now begining to take note of the benefits of outsourcing managment.

Many Russian business owners who hear about management companies do not understand why they should trust someone else with the interests of their business. However, in the West, this system, known as outsourcing, has become a regular practice, creating the foundation of success for millions of businesses and organizations. As a result, many leading players on the Russian real estate market are feeling the pressure to adopt to such European trends and methods of conducting business in order to remain competitive with foreign players.

Becoming Acquainted

First we may ask, why is a management company considered necessary? Many in the real estate business have been skeptical about outsourcing management responsibilities, especially since leading investors and developers usually have been successfully working with the market for a long time. When company heads decide to take up a new project, they finance its construction and subsequently create their own internal structure to manage the facility. Svetlana Beloborodova, deputy director at the management company Sistema, says, “As long as the company has adequate personnel and financial resources, creating an internal management structure is considered an acceptable way of developing a business.”

At the same time, however, a professional management company already has experience and qualified professionals. Its specialists are familiar with the thousands of nuances that must be taken into consideration at the design stage and can advise clients on how to best construct and manage a building, including decisions on choosing building materials and engineering systems. People without this knowledge may neglect such details and produce low quality work, which is already apparent in a number of spheres of real estate. Alexei Karavaev, chairman of the non-commercial partnership of management companies and developers argues, “Ideally, a management company should be involved in a project from the outset. The investor should propose a real estate project that he would like to invest in. He should then announce a tender and chooses the management company that offers the most interesting capital investment.”

However, in most cases, the management company usually enters the project once it has already been built and rented. “If a management company enters a project once it has been built or even when it is under construction, then naturally the company will analyze it in order to form its own opinions about the project’s potential. If mistakes are identified, the management company will advise the owners on how to resolve them or reevaluate their expectations. However, in some cases, owners do not trust the advice of the management company and can refuse to invest further resources in the project or to reformat it. Problems can also arise if the owner overestimates the value of the business and expects to receive an unrealistic profit in a short time, which a management company, regardless of its qualifications, may be unable to achieve.”

Obligations

There are several reasons why commercial real estate owners create their own management companies. In many cases, owners are reluctant to share their profits with an outside company in exchange for a service that could be provided internally. Also, it is very difficult to build mutual trust between owners and management companies, and in most cases, owners prefer to manage their own buildings.

However, owners often underestimate the complexity of a project and the amount of work that it takes to properly manage the business. As a result, many businesses are plagued with problems due to chaotic management, lack of structure, overlapping functions and insufficiently qualified personnel. Many owner have yet to realize that finding a management company to run a particularly specialized aspect of the business can be far more efficient (for example, security or cleaning services).

However, finding well-qualified management experts to work for a company is not easy, especially in the real estate industry. Experts unanimously agree that choosing specialists who understand the specifics of managing commercial properties and who have a reasonable amount of experience in this sphere are few and far between. This is especially true in regional markets, which have experienced a lot of growth in recent times, but are nonetheless behind and still do not have access to a pool of management companies.

Mr. Karavaev states, “Even if the owner of the business understands the need to attract a management company, it may be difficult to know who to turn to, which company would be suitable for the particular business, or how much the management company’s services cost. Currently, there are no general rules for outsourcing in the sphere of commercial property management, or standard management agreements.”

As a result, commercial property owners in the regional market often have no choice but to act as managers, which leads them to make a lot of amateur mistakes due to a lack of experience in management. In particular, owners are not in a position to keep track of the type of tenants brought in, and as a result, may create an imbalanced or disreputable pool of retail companies. This could be very detrimental to both the reputation and financial success of the company. Improper promotional strategies could also damaged the image of the property.

In addition, poorly conceived systems for budgeting and financial analysis of the property can further exasperate the situation. There may also be problems on a technical level, as improper use of the technological equipment on a property can often result in premature system failures.

Doing It Yourself

The efficiency and financial stability of one’s own management company depends to a great extent on the size of the property. If the owner’s structure consists of just one or two properties, then often it will lack a certain level of innovation, operation, level of skill, dynamism and professionalism. In this case, the owner is unlikely to be able to develop a good management plan. On the other hand, with bigger-sized properties, the owner has the room to create a centralized management company in order to organize the owner’s assets under a unified scheme.

How does a management company get involved with a property? The management company begins by assessing the existing situation by conducting an audit of the existing operating management structures in the building. Specialists of LCMC identify the following steps to creating a management plan for a new building:

• Forming and inspecting the organizational structure of the management company.
• Regulating the main aspects of the collaboration between the management company and tenants and other partners.
• Establishing the property’s working rules and principles for providing services to tenants.
• Systematizing and establishing the main business processes for managing and exploiting the property.

ROSS Group advises that first one must consider the purpose for which the management company is being created. Will it be a specific management structure for a specific building or will it start to offer its services as an independent business? Once this is established, it is possible to decide on how to go about it. The issue of needing to attract subcontractors is resolved individually according to each specific case; it all depends on what is most profitable. Are there sufficient specialized facility companies in the city? What resources does the management company have? Can it optimize expenses by having its own staff for each specific aspect? Collaboration with subcontracted organizations depends on the situation and on the scale of activity. It doesn’t make sense to outsource services and employ management specialists if the size of the property and project is small.

In establishing a management company, the owner should not how the building’s success is really judged – profits. Specialists advise that its best to separate the budget of the management company from that of the owner, as property management is a separate business from retail, in which the owner may also be involved in at the property. The owner must have a clear idea of how efficiently the management company is working, which can be done by tracking expenses. If there is a joint budget, it is difficult to follow and control all aspects of the management company’s activity.

Overall, it is very important to track all business activity and financial records in order to design an accurate business plan, which includes regular meetings to plan the budget. Specialists argue that owners should demand that their own management company observes the same accounting procedures as an external one. This helps to hold together the company and encourage achievement of the best possible results.

Miscalculations in business planning that can be “absorbed” under conditions of deficit supply in the market, which can cause an owner to suffer losses as soon as the market saturates. “Regional commercial real estate markets are still quite far from saturation, and therefore management companies are rather inactive. However, I believe that the market of the Ural region will need two years at most to form a pool of active independent managers. Naturally, these will emerge from affiliated companies that gradually start to look for business on the side and at the same time have the powerful backup of the financial assets of the parent company,” asserts Alexei Vanchugov, press-secretary of the Vremya Group.

Svetlana Beloborodova further argues, “The intensifying level of competition on the commercial property market will mean that only players with professional management systems will survive in the long run. Good management will be the trump card in the hands of a business owner. Unfortunately this aspect has not yet been understood and assimilated by owners.”

Thus, management companies will not remain in the shadows for long. The fact that the need for these services is recognized now by a large number of important players can been seen by the formation of independent management companies in Moscow and St. Petersburg. And, as practice shows, trends in the capitals gradually filter down to the regions. All experts agree that the lack of management professionals is a major problem. However, Alexei Vanchugov notes that growth in the number of local specialists is already reinforced by the trickle-down effect of qualified managers from abroad. Considering that the Ural region is one of the most industrially developed regions, offering great potential for investment, it will undoubtedly see to the creation of the region’s own management companies.