Several years ago the concept of “real estate management” in the regions was non-existent. Any reasonably capable specialist from the local communal services authority was considered capable of the task and professional management did not come into question. Moreover, inviting a professional management company to run a dilapidated building is equivalent to buying an expensive antique for an apartment in a Khruschevka… And of course, the amount of resources spent on improving a building must be in proportion to the value of the building itself. With the emergence of strong local developers in the regions joined by national and foreign players erecting new modern buildings, the need for professional companies to service them has started to emerge.

Comparison to the capitals

Real estate management companies’ development in the regions is closely linked to their development in Moscow and St Petersburg. In fact, the Russian capitals set the trend, and regional companies have adapted the latter’s experience to a greater or lesser extent to their local market.

In Moscow, real estate management companies typically base their business on outsourcing. “In these cases, brokers are responsible for renting, cleaning companies for cleaning, etc. Management companies select their subcontractors. This is the European way of working, and as we know the first real estate management company to appear in Moscow came from the West”, notes Alexander Sharapov, president of Becar. Commercial Property.

Deprived of Western players’ attention, St Petersburg’s market developed differently. Russian companies built mainly B-class business centers and given the lack of alternatives, they were managed by local companies that emerged, in some cases as independent structures and in others within the framework of brokerage firms or construction companies. “In St Petersburg, full-scale management is the standard, whereby management companies unite their brokerage and facility-management services under one roof. For this reason, until recently Western businessmen would wonder why, for example, there were no sanitary engineering firms; of course, there were but within the structure of real estate management companies”, explains Nikolay Vecher, vice-president of the Managers and Developers Guild and head of business development at Vneshtorgbank-Kapital. To optimize owners’ expenditure, management companies created vertically integrated structures. St Petersburg’s idea of a real estate management company incorporates the operating unit, security service, and brokerage division. Management companies sometimes also give legal and financial advice.

Until recently, there were simply no real estate management companies in the regions. Mostly, because there was no need – old decrepit properties did not require professional management and the indifference of Western investors and developers did not propitiate management companies’ development. As a rule, buildings were serviced by local owners and developers. Currently, on the one hand, in the regions, there remains a requirement for the pocket-structure system, which, in fact, can still be found in Moscow and in St Petersburg. “In the regions, many owners of large commercial real estate buildings create their own management companies, frequently to the detriment of management quality and profitability. This is due to owners’ mentality and approach, because they are suspicious of handing over control of their property to a separate organization. This is reminiscent of the historical “building blast furnaces in every Chinese courtyard”, comments Gamma Nedvizhimost (Kaliningrad) general manager Vladimir Korolev. MTL. Property management. specialists also agree with this opinion. “The market in the regions is far from transparent. For tax optimization purposes, owners still enforce the system of receiving rent payments in envelopes. Accordingly, taxes are paid on the basis of a small percentage of earnings. Therefore, inviting a transparently-run management company is a difficult issue”, observes Аndrey Lushnikov, MTL’s general manager. “But even if an owner does decide to invite a management company in, it will probably only be to take care of servicing the building: its technical operations, security, cleaning, restaurant service, rather than full asset management”.

Nonetheless, outside companies from both Moscow and St Petersburg are starting to work in the regions, although, it is true, so far this is the exception rather than the rule. As competition in the capital cities’ markets intensifies, large Russian and Western structures (investment, retail, financial, etc.,) are starting to work in cities with populations of 1 million, and, consequently, high-class real estate is starting to be built requiring professional management. Commercial real estate developers and investors experiencing the acute need for qualified management specialists are starting to invite real estate management companies from Moscow and St Petersburg. “Consumers’ growing demand for quality real estate is leading to the design of new projects which of their own accord require professional management and, in turn, the appearance of these buildings leads to stronger competition which motivates the directors of existing buildings to strengthen their position by hiring professional consultants,” explains Аnna Petrenko, analyst at Basovoy aktiv. Hence, currently in Volgograd there are projects for 7 shopping and shopping and leisure centers at varying stages of development, of which at least 2 projects by national developers (DVI Group and Rosoil) are positioning themselves as quality status. This motivated the renowned local player, the Voroshilovsky Shopping Center to rethink its positioning and to draw in the company Torgovy kvartal – region to design a new concept for the shopping center. The outcome of this collaboration is a project for rebuilding one of Volgograd’s oldest shopping centers with Torgovy kvartal responsible for managing the new complex.

There can be no question of working with local management structures because there simply aren’t any yet. The lack of suitable management experience is an initial obstacle to servicing a high-class building. However, in time it will be possible, and as in the capitals’ markets, where Western companies were the first to lead, local specialists emerge to replace them and in time a local management guru will appear after acquiring experience from the capitals’ specialists.

Given the market’s lack of development, the concept of “real estate management” is somewhat exaggerated. “From the range of management companies’ services, the regions mostly require brokerage, cleaning or security services” says Yuri Borisov, president of the Managers and Developers Guild, and managing partner of AiBi Group. Nikolay Vecher agrees with him: “Handing over the management of a real estate asset to an independent company in the regions is still almost unconceivable”. Therefore, “real estate management” as most regional companies understand it, comprises finding tenants, dealing with tenants throughout the duration of the rental contract, technical operations, cleaning and security. Sometimes, it includes conceptual design or development activities”. Lately, there is a growing demand for external consultancy. Firstly, because local developers investing resources into the construction of new shopping centers or office complexes are starting to think more about projects’ viability, and therefore, given their lack of experience in proper full project design, they attract a specialist with first-hand knowledge of market research and positive financial indicators. Moreover, a correctly formulated business plan (including operational) is a vital element for structures financing a project as evidence of the project’s viability. In these cases, a professional consultant is essential. In general, regional commercial property owners are more and more inclined to invite specialists from Moscow and St Petersburg because they understand that the latter have a wealth of experience and understanding of the Russian market’s development.

Modern-thinking owners

Although real estate management companies from the capitals are theoretically willing to enter the regions, given the demand for external management services, they are not particularly rushing there. According to Becar. Consulting, only about 2 in 3 owners are interested in external management. But even then, they will not give more than 10% of the building up for management. Only consultancy services enjoy sufficient demand, from over half the number of owners of projects entering the market – therefore, consultants will be the first to arrive in the regions.

In fact, demand varies according to the regions. In Kaliningrad, for example, a dynamically developing region, according to Gamma Nedvizhimost almost half of new emerging buildings require external management. These are large shopping and office buildings with surfaces of over 10,000 sq. meters. “It is evident that buildings that aspire to be top class assume the need for commercial real estate management. Above all, this refers to regional-scale shopping centers and A-class business centers. In so far as in Volgograd there is only one office building that could be considered a B-class business center – TVK Mercury – and there is only one example of a quality shopping center, which is Park House, we can confirm that Volgograd’s real estate management market is in its early stages of development”, notes Anna Petrenko.

Specialists believe that the main demand for real estate management services in the regions comes from shopping center owners who want to ensure that their centers are maintained to the standard high level. “This is extremely important especially in a shopping center where maintaining high standards ensures customer satisfaction and high visitor levels, which is a major factor for tenant occupancy”, believes Sharapov. Shopping center owners are also more likely to seek consultancy services for project design. This is not coincidental. In several regions at present there are cases where on a single site (for example, at a crossroads) several shopping centers with the same concept are all being built at once. Obviously, when it comes to choosing, tenants and shoppers will prefer the best design. Modern-thinking regional developers understand this and are not saving resources to attract the best experts.

There is somewhat less demand for management services by business-center owners. Often, specialists from the capitals are asked to organize the business-process, to standardize services, provide recommendations and offer consultancy, so that subsequently the owner’s pocket structure can independently service the office premises – cleaning, technical operations, security, etc. Another popular formula is one whereby the local owner or developer will invite a professional manager to the building (from Moscow or St Petersburg for example) to direct the building’s management company. The invited specialist will select a team (or bring along his own) and organize the building’s management scheme. The relative lack of demand for external management companies in the office segment is explained by several factors. Often, office spaces in new buildings are up for sale and therefore, once the owner recognizes that the project is being realized, there is no longer an interest in external management services. Once the building has been sold (and it is frequently sold to several owners in phases), the new owners prefer to service their own premises themselves. In such cases, hiring a professional manager for spaces of less than 1,000 sq. meters becomes unviable, likewise, creating one’s own management structure. In these cases, cleaning, sanitary engineering and technical specialists are sufficient to do the job.

At the same time, it would be wrong to say that professional management companies entirely dismiss the office segment. The services of external managers are in demand from modern business-center owners whose aim is to maximize income while maintaining a high quality of service. “In principle, any manager’s task is to increase the building’s capitalization for its subsequent resale. Maximizing income is one way of ensuring this” explains Nikolay Vecher.

Service cost

The cost of managing a commercial property in the regions, as in St Petersburg and in Moscow, represents on average 10% of gross income. However, at the same time, the final sum depends on individual contracts, the size of the management company, the building’s space, choice of services, etc. “Because the market is insufficiently developed, each agreement is unique, which makes it difficult to conduct a systematic analysis”, declares Vladimir Korolev.

There are various schemes for paying for management services. Alexander Sharapov explains that “Frequently, the cost of an external real estate management company’s services comprises the cost of the services themselves plus a premium for the company’s professionalism. There are various options: for example, as a specific percentage of income, or as a standard fixed charge. A management company’s services may also be paid for as a percentage of net operating income (after standing charges) or as a specific amount per square meter plus a percentage for an established amount of earnings”. Experts believe that the most common form of payment for a management company’s services is as a percentage of income. Normally, a management company’s services would represent between 3 and 10% of income. Also, bonus payments are often made for achieving specific financial targets.

Considering that in the regions requests are often for individual services rather than global, it is relevant to look at the cost of specific areas of work. Thus, market research will cost a regional project’s owner on average US$8,000-10,000. Business development concepts would cost approximately US$25,000 (generally speaking, this would include market research). According to Becar. Commercial Property, project management (depending on the number of functions and the building’s size) represents approximately 1% the cost of a building in Moscow, and in St Petersburg and in the regions. “Additionally, in the context of managing a project, various services could come into play: for example, operational consultancy, holding tenders, auditing management systems, preparing a rental plan, etc. The cost of these services varies depending on the company and work volume: there are too many details, which makes it difficult to be specific” notes Alexander Sharapov. Brokerage costs in the regions on average represent 6% of the annual rent, but it all depends on the number of square meters rented, collaboration conditions, partnership duration, etc.

Prospects

So far, there have been sufficient factors to hinder the development of the regional real estate management market. One of the market’s most significant obstacles is owners’ lack of preparation. Another objective difficulty is regional markets’ lack of quality buildings requiring professional external management. We can add to this the considerable deficiency of trained personnel. There are no sufficiently qualified specialists, which is why project managers are frequently obliged to invite specialists from Moscow and St Petersburg. Regional markets’ development is also hindered by problems relating to regulation concerning land use rights, construction, and ownership registration. The absence of regional analysts likewise hinders the development of a civilized market. In the regions, there is commonly no regular real estate market research or the sources are contradictory, making it impossible to define to what extent they can be trusted and how professionally the research is conducted.

Yet, nonetheless market experts agree that these obstacles will be overcome in time. Already today in many Russian cities, there are leading developers from the West and from Russia’s capital cities launching new commercial real estate buildings in turn making management services fashionable. The issue of specialists will also easily be resolved. “The opportunities for learning both abroad and in Moscow and St Petersburg currently exist. The capitals regularly hold American courses of the СРМ, and ССIM, from which there are graduates in many cities. In St Petersburg there are two important teaching centers: the economics and real estate management faculty at the Polytechnic and Engineering-Economics Institutes. These faculties provide professional courses”, explains Nikolay Vecher. Regarding legal regulations, I would say that these problems do not just affect the regions but also the two capital cities, which nonetheless have dynamically developing real estate management markets.

“Currently, tenants in the regions are willing to pay half a dollar more than the previous one in exchange for quality services. Accordingly, we can deduce that the demand for real estate management companies will grow in line with the market’s development”, observes Andrey Lushnikov. In the first instance, this concerns business centers and shopping and leisure centers. Even the situation regarding buildings with several owners will change. “Owners and especially co-owners, in accordance with their share, will consider how best to ensure their customers’ comfort. Without centralizing services, it is impossible”, concludes Vladimir Korolev.