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The Warsaw Voice » Real Estate » May 20, 2009
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Optimizing Shopping Center Management Costs
May 20, 2009   
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Roman Skowroński, director for development at real estate management company Cefic

Management cost optimization should be considered as the result of a comprehensive approach to the investment process in commercial real estate. Costs should be maintained at optimal levels from the start of the process-the purchase of land.

The investment process
The investment process involves several stages. It starts with choosing a location, followed by a major challenge for the investor, namely managing the process of obtaining construction permits. The next stage consists in creating and refining the architectural concept for the project, and then its architectural and technical execution. This is followed by leasing out space in the facility and developing a marketing concept, ending with day-to-day management and any necessary remodeling and recommercialization of operating shopping centers. Only a comprehensive approach to this process guarantees that overall costs will remain at an optimal level.

Spotlight on professionalism
The crisis is a testing time for the entire business market and an opportunity to go back to the essence of what we call the investment process in real estate.

A test of the investor's professionalism starts at the land purchase stage, when it is extremely important to properly estimate the proportion of the land price to the other project costs. Buying land at a time of a bull market and the hasty snapping up of "bargains" during an economic downturn can both work against the project's profitability.

The next stage of the investment process, the architectural concept, is another opportunity to optimize the costs that the project will generate in future. A good choice of finishing materials and subcontractors translates in a substantial way into the profits and losses the investor will face in future.

Cuts inadvisable
Cost optimization in business is not about cutting spending. Ill-considered economizing at one stage can quickly turn into unexpected extra spending at a later stage of a project. A low price should not be the sole criterion for making choices in a long-term approach to business.

The importance of a comprehensive approach to the investment process also becomes apparent in relations with tenants. It allows one to develop relations with partners, including tenants, on a long-term basis. Close relations with tenants guarantee a low level of business risk, and also greater responsibility for building a tenant mix. Everyone knows that, next to a good location, an optimal tenant mix is the foundation of a shopping center's success.

In an optimal approach to the investment process, what counts apart from a rational examination of every stage are the investor's additional professional qualities such as experience in terms of a long-term market presence and a broad scope of operation. Diversity, a broad portfolio as well as locating facilities in a variety of economically diverse areas has a major impact on the investor's competences and their ability to deal with a wide range of circumstances. A broad portfolio results in a synergy effect of experience and opportunities, for example in the selection of outsourcing companies, which always has a positive impact on running the business of investment activity.

Different approaches to business
As recent years in particular have shown, the commercial real estate market includes different types of developers and investors. A developer whose only aim is to build a shopping center and then sell it as quickly as possible is interested in the financially most profitable method of building the facility, which often influences the quality of finishing materials. This kind of developer doesn't concentrate on the project with a longer-term view but on a quick sale, so sometimes they will use a letting agency to force up rents, as it's not the developer who will subsequently have to worry about whether tenants are reliable in terms of being able to pay the rent.

As is the case with Cefic, the real estate management company founded by investor Simon Ivanhoe, it is important to approach business with a long-term view and be able to predict the effects of current undertakings, with care taken to ensure economic justification for a project in every aspect. In the case of experienced developers and investors who look at business in the long term, there are greater possibilities of contributing an appropriate amount of their own funding and obtaining good terms for loans, and also of developing optimal and stable financial plans, including setting rational priorities for a given investment project.

Another type of investor on the commercial real estate market is the financial, institutional investor. This is often a bank or an investment fund that hires an asset and property manager to deal with management, and it is this manager who has to weigh and flexibly adjust the needs and expectations of the owner and the tenants. There is yet another kind of investor, someone who builds for purposes other than commercial, though their sometimes over-invested project is not without a chance of making a profit at some point. Such investors are motivated by leaving a mark on history and often want to use their project as a means of fulfilling some kind of mission. These investors usually deal with managing the commercial project by themselves.

Serious test for the market
It's certain that in the present economic situation weaker management companies will be put to a serious test. Signals are coming in from the market that financial plans are being amended, which means that not all companies have been working on the basis of optimally constructed budgets. Wherever project cost management at a time of prosperity was based on stable, long-term and rational foundations, there is little room when a crisis arrives for cutting costs without influencing the quality of services. The standard of a shopping center cannot deteriorate, so a tough economic situation does not justify reduced spending on management. Cuts, in this case wrongly called cost optimization, are possible at facilities that managed costs irrationally in the period of prosperity.

It is certain, however, that if external costs drop, such as labor costs, this will also have an impact on reducing management costs. The costs of outsourced services need to be monitored as well-not just during a market slump, but on a regular basis. This is the only way of cutting spending for companies that have so far operated optimally. One should not, for example, consider reducing the number of security or cleaning staff if there were not many of them in the first place. Perhaps savings can be made on cleaning agents, for example, if cheaper products are chosen, but certainly not on the service itself.

A shopping center's expenses are predictable and cyclical. An annual operating budget is planned, for day-to-day expenses, and also a five-year budget with investments in mind. This is where funding for renovations is included, planned in advance or in connection with necessary replacement of systems. If planning has been rational, there is nothing that can be cut.
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