Commercial real estate has been an attractive market for many years, and not just for large investment and development companies but for private investors as well. As a rule, larger properties are inaccessible to the smaller market players by virtue of the price, leaving them with the street retail sector and other smaller ventures requiring a more limited minimum initial investment. With such investment projects, proprietors may count on increasing their initial capital, in the majority of circumstances. However, as most commercial property owners do not involve themselves in the core business itself, the question of management naturally becomes important. How will the facility be operated, and by whom, so that revenue can stay consistent and property value can continue to rise?

The accumulation of a large diverse quantity of real estate assets by private owners has motivated the emergence of a management services sector, a completely new phenomenon in the Russian market. These services are not unlike those already made available by larger investment firms, which specializing in stocks, bonds, and convertible debenture. “These services include more than just the technical functions and maintenance of these properties,” says Andrei Bushin, the director of Miel, a commercial real estate management and development company. “The essence of private property management is the operation of properties as assets.” Suppose the owner of several street-retail facilities wants to achieve the maximum possible revenue with his property. He solicits the services of a private property management company and the company begins to manage his assets. Their task is to produce strategies for dealing with tax burdens, record keeping, and cooperating with tenants and state organizations in order to make business run more smoothly and effectively. The ultimate task of this company is the maximization of revenue and thereby the increased capitalization of a property on a long-term basis. A private property management firm’s second role is as an investor. If the private investor injects a certain amount of capital into an enterprise in the commercial real estate market, the professionals can certainly do a great deal to make this investment more effective. Additionally, all additional investment agreements and tax questions lie firmly on the shoulders of the management company, per the wishes of client, who may have run the property in the past. In this way, the client is not distracted from his own various business activities and the management company works to develop a plan for investment and for long-term management.

The Trailblazers of Private Property Management
“Potential clients in this sector include private entities which possess definite capital and are interested in investing in putting it somewhere lucrative,” says Aleksey Averyanov, the general director of Vesco Consulting. “As a rule, these individuals already are experienced investors, well used to the stock market and to unit investment funds. They have decided to directly invest in real estate in order to achieve more control over the revenues.”
“Most of our clients are involved in upper or middle management of a profiled business,” says Andrei Bushin. “These individuals have acquired their real estate at some point while involved in other business dealings, and simply haven’t the time or the opportunity to fully occupy themselves with the details of running a property themselves, outsourcing the project to us instead.” Elena Zhilskaya, head of commercial real estate for DeltaRealty, adds that, “Our clients are very often the proprietors of office areas located on the first floor of a residential structure.”

Oh Competitor, Where Art Thou?
In principle, similar services are not new for the market. Professional management companies offer them for all of their companies. But the current question deals with projects of a completely different scale. The majority of such management companies interest themselves primarily with significantly larger properties, as these are the projects on which much of their income depends. The result is that smaller projects are simply not interesting for the bigger management companies. A 500 sqm structure requires the creation of the same administrative structure that a 5,000 sqm structure requires, but there will be significantly less revenue.
Today the real estate market is beginning to see a number of private property management services which have no wish to compete with the larger companies, but are determined to occupy a completely different niche on the market. These organizations are beginning to offer management services to clients operating on a much smaller scale, in facilities ranging from 100 to 2,000 sqm. “The companies which today work with Private Property Management are still using obsolete methods – they have very few clients and are still forced to work out individual business schemes for every client. In the future, however, it will be necessary to optimize business by creating out policies that can serve a greater and greater quantity of clients,” says Aleksey Averyanov. “It seems to me that the growth potential for such services makes it worthwhile for a management company working with real estate to cooperate with management companies working in the stock market. I won’t reveal all our secrets, but we have a plan to create a strategic alliance with one of the largest companies in the stock market to manage their small-scale properties.”

Breaking Free and Breathing Easy
There are a variety of different strategies available for these management companies – every thing depends on the location of the property, which services are required by the proprietor, and even which services the proprietor prefers to perform himself. Most proprietors in the Russian market are still unwilling to yield total control to management companies, and this is largely why the asset management business is currently so underdeveloped. In essence, asset management is based in trust. A management company is almost wholly responsible for the proprietor’s property and for relationships with tenants. The founders of the project grant the management full discretion over the property, as long as the required revenues are achieved in the end.
Naturally, proprietors impose limits on the managers of their property – for example, a manager may not sell or transfer the property in any way. “We always insist on written contracts to explicate the services framework within which the property will be rented out and operated,” explains Andrei Bushin. “We collect the rents from our tenants and cover the expenses specified by the parties involved in the contract, which may include remodeling work or technical reorganization and upgrading. After the expenses are settled, the remaining profits are passed on to the proprietor. Having signed this sort of contract, a proprietor doesn’t even have to think about the property until he gets the big check at the end.”
A management company designs policies for operation and maintenance, prepares the budget based on the appropriate and necessary expenses, concludes agreements with potential tenants regarding the services to be offered, concludes any deals with the subletting companies, carries out maintenance and operation, settles any problems related to utilities, collects the rents, organizes the property’s accounts, pays its taxes, and works with government organizations to insure that everything is legal and above board.
“Since we take our percentage out of the proprietor’s net income, and not out of the gross, the proprietor can be confident that we are making the most of any project’s budget - not just throwing away his money to solve the headaches we were hired to solve in the first place,” explains Andrei Bushin. “The value of private property management services may be worth from ten to fifteen percent of the net operational income. In this way, we are oriented toward maximizing possible profit of any property and reducing the costs of its upkeep.”

A Prudent Move – or a Risk?
Private property management is developing quite actively today not only in Moscow, but in the regions. Clients from St. Petersburg, Yekaterinburg, Novosibirsk, Omsk, and from other cities are taking advantage of it. “Every month we receive two or three applications from the regions. It makes up about five percent of our total client pool. But the market is developing, and soon there will be far more clients in the regions,” says Aleksey Averyanov. “Of course there is not going to be a stampede. Direct investment in real estate is a very complicated instrument and much riskier than going through a mutual fund or a private equity fund. This is why many more investors use that route instead.”
Even so, experts are confident that the number of property owners interested in the services of a private property management company can only grow. This system helps to economize the time, energy, and financial resources of the proprietor, so that he can focus on the development of his own business, and this sort of outsourcing is becoming more and more attractive. The additional revenue generally seems to be worth the risk.