From AM to PM

Keeping tenants happy is how Peter Love, a partner at Colliers International responsible for property and asset management, describes his job. "A property manager is like the concierge of a hotel. Just as a concierge ensures the hotel guests have everything they need and are happy, a property manager must do the same for his clients. We need to provide a high level of service to both the landlords and the tenants. We are hired by the landlord but paid indirectly by the tenants through their service charges." Happy tenants, as he explains, are more willing to extend their leases. Because one way of measuring an asset's value is to examine its income stream; raising the value of a property becomes simply a question of filling it with those tenants that are willing to pay the most. Reducing the operating costs (such as security maintenance and cleaning), reduces its impact on the overall occupancy cost to the tenant, allowing the landlord to maximise the level of rent he can charge for a given building. "It's important to provide a sufficient service quality within a reasonable price range," Peter Love explains. Some funds look upon a property as they would a bond. They buy the buildings and then collect rents instead of interest before selling them. According to Peter Love, such funds tend to concentrate on core assets that do not present much requirement for active management.
One such fund seems to be IVG Warsaw Fund, which manages a portfolio that includes such Warsaw buildings as Pałac Młodziejowskiego, Le Palais and the BTC Office centre. The fund invests in core and core-plus properties in Warsaw.
Fund manager and member of the board of IVG Austria Andreas Rosenberger defines core properties as: "High quality existing properties with stable cash flows based on long-term leases with creditworthy tenants. And located in established markets in very good locations, suitable for lower risk long-term investments." He sees Warsaw as a town that, when compared to cities in Western Europe, can offer an extra 100 basis points on yields. The Warsaw fund has no real interest in expanding into properties outside the city's central business district, because it would destroy a strategy that has already been clearly explained to investors, and also because, in the opinion of Andreas Rosenberger, it is only in the very centre of Warsaw that vacancy rates are not going to be compromised by the increase in office space supply that is currently in the pipeline. For IVG maximising asset value is mostly a question of buying and selling at the right time. Such a business model is very dependent on having people on the ground. "Flying in, flying out does not do the trick," explains Mr. Rosenberger. "If you're not there when the cycle is up, they will not sell to you when the time is right." He further explains that IVG follows what he calls a "top down and bottom up approach." Not only does IVG carry out thorough due diligence of the building, but it also produces theoretical models of how the market is to react. As Mr Rosenberger elaborates: "Four times a year we review where the market stands and what investor demand is like. We always benchmark our properties against our cash-flow model. When we outperform our internal rate of return, then we are prepared to sell." IVG normally makes such calculations over a ten-year period, but admits that most frequently it only hangs on to buildings for between five and seven years.

All they need is love
One recent example of a core-plus property changing hands was the EUR 210 mln acquisition late last year of the Warsaw Financial Center in the Polish capital's central business district. The new owners of the 50,000 sqm office tower are Allianz Real Estate (with an 87.5 pct stake) and Curzon Capital Partners III, L.P., a fund managed by Tristan Capital Partners, which is also the asset manager for the building. Given that the WFC was actually completed in 1998, it would seem to be a prime candidate for a major overhaul. Was this what attracted its new owners to buy it? Karol Bartos, the director of portfolio and asset management at Tristan Capital Partners insists that this wasn't the main motivation behind the acquisition. While admitting that the building will have to be brought up-to-date in some respects, in fact the strategy they are adopting is one that is both careful and gradualist: "Warsaw Financial Center, compared to other properties, is definitely a building where a strategy is achieved through stable and gradual value growth. Looking at the property we acknowledged its prime location and good construction. The building provides a very efficient floor plate, a good parking ratio and a high technical specification. One could argue that it is a very good proof that buildings from the late 90s, contrary to the common mindset, are not becoming obsolete. They just need some tender love and care from a capable team." In his opinion, Poland needs to follow examples from abroad: "The popular trend in Poland to try to completely demolish or substantially refurbish older stock in fear of obsolescence is long gone in Western Europe, where investors have noticed that buildings that are 20 or 30 years old are considered equally good investment product," claims Mr Bartos.
So what is Tristan planning to do with such prime, but maybe non-standard asset? While Karol Bartos claims that they had a clear strategy before acquiring the property, now that they have their hands on it they are getting down to fleshing out the details, and much of this concerns existing leases: "One way is to maximise rental income by re-gearing leases which were signed at a cyclical low. Another would be to institutionalise income, by seeking for higher recoverability of operating expenses, while looking to decrease the running costs of the building. This could potentially allow for rental increases as most occupiers look at the total occupancy cost. Tenant relations remain crucial here, as keeping existing tenants is always cheaper than attracting new ones. The WFC is a perfect example. Over the 14 years of its existence it has had tenants moving in and out, but the great features of the building have easily attracted newcomers and the occupancy ratio has remained high. The quality of the operations will remain in our focus to ensure tenants are highly satisfied with the building's services. We will be using various tools to do that, including third party surveys in search of answers for how this could be further improved. This is a very human business and people perception is very important," explains Mr Bartos. To go about this, Tristan is to offer a number of incentives for those who would either like to become tenants or extend their leases. "These vary from rental abatements through fit-out contributions to cash contributions. Where we are also very flexible is in securing tenants' specific future needs in terms of expansion. We will discuss with them on a regular basis to make sure our leasing strategy allows their businesses to grow within the WFC," says Mr Bartos. Apart from attracting and keeping existing tenants, Tristan is also looking at making physical improvements to the WFC. The seventh storey originally served as an amenity floor, housing services such as a restaurant for tenants. According to Karol Bartos, with the rapidly growing number of such services accessible in the neighbourhood, the floor naturally lost its client base. "We have decided therefore to convert it into office space and move the restaurant along with other necessary services onto the ground floor, where they will also be accessible by customers from outside the building. We are also introducing an indoor bicycle park in response to people's increasing interest in commuting to work on two wheels," reveals Mr Bartos. In addition to this, the company is planning to make aesthetic improvements to the lobby, which up to now has remained in its original art deco style.

The importance of property management
Tristan Capital Partners, although acting as asset manager for the WFC, has followed a trend that has been gaining popularity in recent decades and entrusted the property management to Colliers International. "This solution gives us the flexibility to realise our various strategies across our portfolio. Over the past thirty years many fund managers, who had previously kept property management services in-house, have outsourced these to third parties. The solution is relatively cost-efficient and allows for access to local knowledge and presence, which is quite relevant for the profitability of operations. I also find working with multiple partners inspiring, as they come with various ideas worth implementing. The good part is that over the last decade standards in Poland have improved a lot and there are now quite a few large players on the scene that provide full-scope services."
Peter Love of Colliers International admits, however, that while funds are increasingly outsourcing the property management side, they are reluctant to give up on the asset management itself: "Most of our clients still have the asset management function done in-house," he says. Asset management is perceived as a high value service, but it requires a physical presence on the market. It might not be worthwhile to set up a branch in order to manage one or two properties, so when a fund has a limited presence in a particular country, then it may consider outsourcing. Often, though the decisions made by asset managers involve greater expense than those made by property managers. Although budgets for asset managing may be decided by the contract, decision making can be slowed due to the need to seek the direct approval of the investor.

Further afield
In terms of location, clearly some asset managers are more adventurous than others. Secure Property Development & Investment is present in Romania, Bulgaria, Serbia, Ukraine and Montenegro. "These markets have the best fundamentals in Europe, including low government debt and faster growth," says Lambros Anagnostopoulos, the company's CEO. "So far, there have not been many success stories. These markets opened up in the last ten years and from that point of view there has not been enough time to make money. People see it not as they should see it - as an incidental timing issue - but rather as a fundamental of the market." According to Mr Anagnostopoulos, the quickest way that an asset might be re-valued is through the replacement of inefficient property management structures. "It's not necessarily the amount of money you put into a property", he says "It's not always that you find a property is well managed, so putting a few things right can really improve the value."
Such an increase in value can sometimes be large, according to Rockspring Property Investment Managers. Although focusing mainly on retail, they have purchased buildings such as the Atrium International Business Center in Warsaw. Recently they closed their EUR 700 mln TransEuropean V fund, which is to invest in core, high yielding core-plus and value-adding European assets. "A significant driver of returns is driven by asset management, but that depends on the property," explains Kevin Muscat, the assistant director of European investment at Rockspring. Currently they are in the market for more properties in Poland but, "We are not really buying now. The pricing has become too hot," says Jo de Clercq, a partner of Rockspring. He then explains that much of the reason for the high pricing is the fact that generally speaking there has been less leverage in Poland, with far fewer distressed properties. Currently Rockspring does not have an office in Poland and outsources much of the management of their properties there. As Jo de Clercq explains: "We do have a local asset manager based in Budapest." He covers all of Central Europe, focusing on offices and overseeing retail managers, "but retail requires active asset management, so we have formed a joint venture with a partner in the Czech Republic, and in Poland we have an asset management partner," explains Mr de Clercq. The company bought the Olympia shopping centre in Brno together with ECE Projektmanagement, while in Poland it has turned to Balmain Asset Management. Surprisingly, Kevin Muscat claims that reputable developers will occasionally fail to maximise the value of their projects: "Sometimes developers have a short time horizon, so they lease quickly and don't think about the long term viability of the project." Rockspring clearly has a preference for retail over office properties in the CEE region. According to Kevin Muscat, the office market is more cyclical than the retail and industrial markets and also involves more capital expenditure: "Occupier demand is waning and there is not much room for growth," he says.

How many tenants?
Generally speaking, funds prefer multi-tenanted buildings, since there is always the risk that a single tenant may vacate a property and thus produce no income. Such buildings often require a more active asset manager. According to Peter Love, a building such as the Warsaw Financial Center might have up to seventy tenants with an average leasing period of around five years. This would mean that every year one fifth of the leases would come up for renegotiation. Funds are not averse to single tenants but in such a situation the fund is, as Mr Rosenberger of IVG says "buying the credit worthiness of the company." Funds feel comfortable with blue chip companies but perceive more risk with lesser known firms. Occasionally with single tenant properties, all the operational costs of the building can be handed over to the occupant, but this is not a common arrangement, partly because there is the perceived risk that the tenant has little incentive to maintain the building at a high standard and so oversight is required. With retail the situation is somewhat different. Here shorter leases are often preferred, because when buying a shopping centre the fund usually plans to maximise the yield through changing the tenant mix and re-commercialising the property.
One improvement that can be made to many properties is to apply for environmental certification. "We would be interested in buying a property without a green certificate, but such a building should be in a position to get one. It's an important issue for our clients and could become a tick-the-box issue when it comes to exiting the property," explains Mr Rosenberger. Despite this willingness to certify buildings, it does not appear to directly raise an asset's value. "It's hard to get evidence that you pay more because a building has been certified," explains Peter Love, although he also says that it is easier to maintain its occupancy if it has a BREEAM or LEED certificate. Once again, despite the differences in market strategy between funds, when it comes to maintaining property values, it is occupancy that is all important.

Alex Hayes, Nathan North