Trusting relationships between owners and management companies on the retail real estate management market are very rare occurrences. Indeed, the overwhelming majority of owners maintain their own facilities independently. On one hand, the complete lack of an outsourcing culture in Russia is to blame; but, on the other hand, it would not be fair to contribute the independence of the owners only to issues of mentality, as the market is fairly immature and specialized management companies serving only shopping centers, in general, do not exist. Many owners make arbitrary decisions on creating their own management structure. Could affiliate management be qualitative? How is a management company set up at a facility? What is independent management fraught with and what are its advantages?

There are several factors which cause retail real estate owners to set up their own management companies. “More often than not it is the underestimation of all the difficulties in managing a shopping center. As a consequence, owners wish not to ‘split’ the profits with an outside organization for services they themselves could organize at their own facilities,” says Dmitry Zotov, general director at Torgoviy Kvartal.

Retail real estate management is a more complicated business than, for example, office management. However, retail real estate developers, immigrants from the retail sphere, mistakenly believe they know the retail business better, and they equate it with the knowledge of retail real estate. Accordingly, they ask why they should waste funds on hiring a management company, if it is possible to save by creating your own management structure. “In the shopping center segment, as a rule, the owner agrees with the anchor tenants on the fundamental conditions for their participation in the project, and the owner is wary of entrusting these fragile agreements to a management company,” Tatiana Skalandis, general director London Consulting & Management Company (LCMC).

“Owners, who only open for themselves shopping center development businesses, treat their facilities with reverence. These are toys for them, and they do not have the power to tear them away from their hearts. As soon as they play a bit in managing and start to treat the real estate facilities as profitable businesses, outsourcing in the shopping center sphere will begin to gain momentum,” believes Elena Florinskaya, partner and development director at ROSS Group.

Furthermore, there are more “market-oriented” factors for owners’ objections to outsourcing. Experts unanimously talk about the negligibly small selection of specialists with an understanding of the specifics of retail real estate management and possessing acceptable experience in this sphere. Correspondingly, owners, even those who do not wish to fulfill their “own” work, are compelled to do it. As a result, an owner begins to practice “self management,” which, given the lack of necessary experience, is fraught with errors in managing the facility, a decrease in the profitability of the shopping center and a drop in capitalization.

First and foremost, the concept suffers. The owner, as a rule, is not able to follow a conceptual approach to outfitting the complex with tenants; therefore, the creation of an unbalanced and substandard pool of retail companies causes a loss in image and a failure to achieve the planned profitability indicators. But even if an owner realizes the importance of adhering to a concept when selecting brand names, numerous non-market factors could influence him, which would be irrelevant in the presence of an intermediary between the owner and the tenants.

“We had the experience when an owner of a regional shopping center was prepared to entrust management to outsourcing for the simple reason that he was fed up with not realizing a full profit from the facility. Numerous friends were leasing premises in his shopping center at symbolic rates, and the owner was uncomfortable with refusing them. In this sense, a third-party management company entrusted with making decisions on outfitting the complex as well as lease rates will refuse all those who do not correspond to the image and financial policies of the building,” says the ROSS Group.

Among other conceptual errors are poor promotion which leads to loss of the facility’s attractiveness in the long-term prospective; financial difficulties, such as an unproven means for budgeting and financial analysis at the facility, resulting in a misunderstanding of the actual picture of the centers financial expenditures and their economic feasibility.

“In successfully operating centers today, the staff of a management company responsible for leasing out the premises always has the possibility of receiving refusals from the merchants striving to enter the shopping center. It works out that shopping centers are becoming a stable, high-yielding, tax exempt trough for its “own,” says Anna Shiryaeva, general director at Magazin Magazinov.

Moreover, there are problems in the technical sense. “The unprofessional use of complicated technological equipment installed in the facility oftentimes becomes the cause of premature failure of high-cost systems,” says Zotov.

Generally, the problems are basically associated with the chaotic state of management, lack of structure, overlapping functions, shortage of qualified personnel, as well as the owner constantly interfering in the business processes. “It would seem omitting the obvious things (if looking from the sidelines), the ‘clouding’ of vision, the lack of innovation – this is the main problem of an owner managing a facility,” believes Anna Derkach, general director at the Center for Retail Estate Facility Use (a subsidiary St. Petersburg Nedvizhimost corporation).

However, as Shiryaeva correctly notes, which is the worse of the two evils: an owner’s non-expertise or outsourcing, which is another matter. Indeed, there are very few professional companies capable of resolving a whole spectrum of management tasks in a shopping center; therefore, setting up one’s own management company at a facility sometimes seems to be the sensible solution to the complicated market situation.

Could and affiliate manager be adequate and system-based? “An owner could try providing quality management without hiring an outsourced management company; but the main condition is competent management with serious work experience. However, in this case, the owner must understand that he also will have to dedicate all of his time and energy to the process,” believe the specialists at Torgoviy Kvartal. In the West, a number of large companies, system-based shopping center owners, create their own management companies. Indeed, given this it is worth noting that they are consummate professionals dedicated to the development of shopping centers for many years, knowing their business thoroughly. The owners create their own management companies in the conditions of a market saturated with the appropriate professional personnel. Moreover, they do this because outsourced management companies do not meet their high requirements.

“Affiliate management could be qualitative, if the owner hires a professional manager on the market who creates a management structure himself. Or the structure could be created by a consultant company with experience managing real estate,” says Skalandis.

Effectiveness and financial justifiableness of one’s own management company will depend a lot on the size of the premises possessed by the owner. If the owner’s structure is small – the maintenance of one or two facilities – in the majority of cases it will steadily cede to the external structure in terms of innovation, efficiency, adaptability, activity and professionalism. Accordingly, the owner cannot optimize expenditures on management, such as the staff, operational schedules, equipment, etc. Possessing dozens of buildings, the owner can create a centralized management company which will manage the owner’s assets based on united operational schedules.

The activity of a management company at a facility begins by analyzing the current situation, an audit of the current management structure and the situation at the facility. If the facility is a newly built one, activity begins with an organized design of the management structure. LCMC specialists outline the following tasks when installing the management process:

• Set up and inspect the organized management structure of the company.

• Regulate the fundamental issues of cooperation between the management company and the tenants and other counter parties.

• Establish operating procedures and regulations for the facility and principles for rendering service to the tenants.

• Systematize and set the fundamental business processes for management and use of the property.

First and foremost, the ROSS Group recommends understanding what the goal is for creating the management company. Will it be for spot-managing a specific facility or will you offer your services on the open market as an independent business? As soon as this is determined, you can think about how to put it into operation. The necessity of recruiting subcontractors to work is a matter resolved individually in each case. Everything depends on what is more profitable: Are there enough specialized company offering management resources established in the city or could expenditures be optimized by maintaining internal service personnel for each specific task? “At the Moskovsky mega-complex in Samara, the owner’s own management company entrusted cleaning to a subcontractor; however, in time, it was clear that the quality of the work was not satisfactory. Therefore, it was necessary to create its own cleaning subdivision,” says Florinskaya. “The company also organized its own security agency. For many cities in Russia, it is typical when an owner is set to relieve himself of the headache of maintenance, but is not always able to find an alternative. Now the cleaning-services company at Moskovsky offers it services to other shopping centers.”

Cooperation with a subcontracting organization depends on the situation and on the scale of activity. It is worth maintaining your own specialists on staff in the management company for various work assignments only after there is a definite (calculate) amount of square meters in the owner’s asset.

An important step in organizing your own structure is attracting an experienced management-company director to the facility, who will manage all the processes, assemble the maintenance personnel, have the facility operational, be capable of conducting a tender for selecting subcontractors (if necessary) – in general, put the business management on line.

In this sense, it is logical to invite a manager to the facility who knows from experience how to make a building successful. This could be an employee of a large management company offering services for establishing a management business. Having established all the business processes, he can confidently withdraw, leaving the operating management company in its place. A real estate market consultant could give professional advice. It is possible to find a capable manager by using the help of simple headhunting – in this case, the employee settles the work of the owner’s management company, but does not leave and stays to supervise the process.

When setting up the management company, the owner should not forget about the key parameter of the building’s success – the financial indicators. It often happens that the owner thinks about everything other than the building’s economics. “If this is the first toy and the owner is participating in the management process, he will not try to economize on little things. For example, he will buy expensive cleaning equipment which does not correspond to the building’s class level. He will not strive to optimize, and this will very significantly affect the project’s profitability,” says Florinskaya. “We had one eloquent example of how far an owner is from the economic feasibilities of his actions. One regional company built a clubhouse just below Ekaterinburg, which was outfitted with a fitness club, spa salon, a coffee house and a restaurant. Taking into consideration that nobody had done anything similar in the city until this, the outsourcing-company market was not present, and the owner had to do everything himself. As a result, the owner did not worry about money – even for an anti-claustrophobic solarium. However, if a management company had been hired to work on the facility, it would have approached the project business-like, viewed it unemotionally and from an economic point of view.”

When creating your own management company, specialists recommend separating the budgets of the management company and the owner: real estate management is a separate business, differing from, for example, retail, in which the owner can also engage at the facility. The owner must understand how adequately – including in the economic sense – the management company is working. Having a single budget makes it hard to monitor and control the activity of the management company.

By the way, about monitoring – it is worth thoroughly recording all business processes and accounting forms, developing a clear and concise business plan, planning and budgeting regularly, including annual and long-term, so the owner would have a forecast of the forthcoming income from the facility, and that it corresponded with reality. Specialists are certain that an expert owner should demand from his own management company the same accounting forms as from an external management company. This assists in keeping the company “in form” and striving for the best results. “The accounting records of the management company must be organized so that the full list of business transactions completed by the management company is transparently reflected in the record and yields an evaluation,” says Zotov. “The accounting forms as well as the interval for presenting it is regulated by the contract and current legislation.”

With the increase in competition on the shopping center market, owners’ attitudes toward the issue of management will change, and this will become the definitive aspect in the battle for tenants. The principal moment will be the competition of assets which will force developers to focus on the construction of shopping centers. All this will cause growth in the outsourced management company market. Professional outsource management, on one hand, will allow owners to more qualitatively maintain buildings; while, on the other hand, it will not distract them from vital tasks. As soon as the owners have played a bit in management, and the market offers a capable alternative, the owners’ own management companies will cease to exist. It is true that this is not about companies servicing large developer corporations.