Famous for fifteen minutes

Low margins in return for stable revenues. The credit crunch has led more companies to focus on the development of their property management departments. How will the situation on the market change after the crisis?

Mladen Petrov

During a business meeting in Great Britain recently, my colleagues from the property management department were surprised by the large number of PM companies on the Polish market,” recalls Iwona Sadowska, the head of the property management department at Savills. The last two years have been an important period for the Polish property management market. “In the first years of the crisis we changed our strategy to maintaining our real estate portfolio and the volume of revenues at pre-crisis levels. We achieved our target, offering extended services and maintaining their quality at the same price. In 2010 we tried to extend our hold and we signed new contracts in a continuation of our strategy,” claims Grzegorz Dudziak, DTZ’s strategic head of property management in the CEE region. In June 2010, DTZ took on a portfolio of five shopping centres owned by Charter Hall with an area of app. 170,000 sqm, while in December it was put in charge of another four centres with a total area of 109,000 sqm owned by Bainbridge. With the addition of the new facilities the agency now has under its management, it has increased the number of shopping centres it manages from 11 to 21 and its total portfolio now has 40 commercial properties with a leasable area of 960,000 sqm. The position of the agency in this field has been built, among other factors, on the experience acquired thanks to the global merger with property managers Donaldsons Poland in 2007.
Smaller and smaller slice of the cake
Other agencies also underwent growth during this period. Last year, Cushman & Wakefield increased its portfolio of managed properties by 18 pct up to 510,000 sqm. Recently the company has taken on the management of the Lipowy Office Park office complex in Warsaw, which has a leasable area of 38,000 sqm. So the biggest players seem to have coped well over the difficult period, despite the fact that new competition has arrived on the scene. Jones Lang LaSalle has been developing its property management department since the end of 2009 and CB Richard Ellis since the middle of 2010. JLL already manages facilities with a total area of 75,000 sqm in Poland and a total area of 160,000 sqm across Central Europe (in the Czech Republic, Hungary, Romania, Croatia and Poland). Currently it is headed by Virginie de Baere, the agency’s CEE property management director. Meanwhile, rival agency CBRE is now competing for its first contracts.
Is the present market situation encouraging for new players entering the market? Krystian Modrzejewski, the property management director at CBRE, believes it is: “I think that it will be global companies that will make the biggest impression in the next few years – those that can service the real estate portfolios of a given client in several countries, regardless of whether they have been on the market for a long time or have just entered it,” claims Mr Modrzejewski.
Replacing revenue
Agencies, therefore, have found a way to survive the crisis and the consequent decline in income from the traditional agency work that used to bring in high revenues. When Iwona Laszkiewicz started work as department director two years ago, King Sturge employed seven property managers responsible for 11 facilities. Today the property management department employs 36 people and has 51 properties in its portfolio with a total area of over 500,000 sqm. The recruitment of more property managers is now in progress at the agency. “Our department makes up nearly half of the company. However, this does not relate to revenues because property management is characterised by low margins. Nevertheless, during the crisis agencies have learnt to appreciate the fact that management brings in steady income,” explains Ms Laszkiewicz. Grzegorz Dudziak emphasises that some have added PM services to their offer because it is a relatively easy area of business that delivers a fixed income. “However, property management has been changing. It is no longer mainly administrative work. Facility owners expect much more nowadays, and so in order to come up to their expectations a suitable organisational structure and long-term experience are needed. Just the fact that the department director has a recognisable surname is not enough,” argues Mr Dudziak.
Monika Rajska, the deputy managing partner of Colliers International Poland, shares this opinion. “It is clear to see that property management is entering a new phase of development. It has become more and more competitive, resulting in the growth of competencies and the scope of responsibilities of management companies. It is expected for a good manager to be a walking compendium of knowledge. Nobody employs companies that ‘somehow’ manage anymore – the quality of the service is now more important than it has ever been,” declares Ms Rajska. As she points out, Colliers International increased its portfolio last year by 30 pct on 2009, up to 744,500 sqm. “Looking at the possibilities that exist on the PM market, we need to emphasise the increasing levels of innovation and the growing efficiency of managers, because the best management companies today have better-adapted procedures, including their control instruments and the software at their disposal,” she adds.
Who will win the war?
Current trends seem to favour big players with recognisable global brands. All the people we interviewed stressed the fact that now, more than ever before, the owners of buildings are paying attention to the market positions of the companies bidding to manage their properties. “Globalisation has led the big funds to prefer to restrict the number of companies managing their portfolios, choosing those that are present in most of the countries they operate in,” says Iwona Sadowska. “It is more difficult for smaller companies to fight their corner due to the fact that players which have been present on the Polish property market for longer have established their positions and relationships with clients. However, my observation is that the construction market is not that tight and projects are being carried out by companies taking their first steps in commercial development in Poland. This might open up an opportunity for smaller companies to win contracts,” believes Ms Sadowska.
Regardless of size and experience, management companies now have the same problem: the constant slide in the price of their services. “Winning projects by means of price dumping does not suit most players. However, it is increasingly becoming a common method of acquiring a bigger number of orders,” claims Iwona Sadowska. The term ‘price war’ can often be heard during conversations with Polish  PM players. According to one of our interviewees, due to the lack of new projects to be managed “expansion through pushing companies out of business” is taking place at the moment. Examples are cited of the alleged 3 pct margin, which one of the big players on the office property management market recently agreed to go under. “In better times the margin fluctuated at the level of 10–15 pct,” claims one of our interviewees. According to another, the management margin in the case of shopping centres has slumped from 4–6 pct of centre revenues to 1 pct. In the case of popular malls, a property manager can make a living even on such a low margin, but things are worse when the owner has problems paying.
Moreover, it can happen that the owners of buildings that are looking to make savings find an excuse to prematurely terminate the agreement with the current manager in order to invite in another on more favourable terms. Another current trend is for property owners to expect the number of services to grow. “Currently it is hard to make money out of management. Price has become the most important selection criterion during tenders for the owners of buildings. This is happening because it seems that all companies are offering a similar quality of service,” comments Rafał Mateusiak, president of the board of NAI Estate Fellows. The agency, which joined the global NAI Global chain last year in order to raise its profile on the market, currently manages facilities with a total area of app. 200,000 sqm. It is counting on finalising contracts for another 100,000 sqm in the near future. “As a small company, we could initially afford to offer 30 pct cheaper services than our big competitors while still maintaining a good margin. Due to the crisis we have lowered our rates, just like the competition which has let them drop much lower. The question is: how long can big companies afford to subsidise this business?” wonders Mr Mateusiak. “Unfortunately, recent tenders have demonstrated that it is the cheapest company that wins. Tenant satisfaction remains of secondary importance,” he concludes. “There are situations when we feel that market players are offering lower prices on the verge of profitability – or sometimes even below the actual costs,” claims Bartłomiej Łepkowski, the head of property management at Knight Frank. He adds to this that: “Maybe in doing this they are looking to secure more contracts and expand their portfolios. However, in the long run this could lead to a lower quality of service.” The firm currently has 900,000 sqm of space under its management, including the entire Polish portfolios of Deka Immobilien (190,000 sqm) and SEB Investment (100,000 sqm), both of which were secured last year.
Drawing the line
Increasing portfolios at any – even the lowest – price is problematic for all players. Iwona  Sadowska of Savills has also observed such a trend, but points out that companies cannot afford to subsidise this kind of business in the long run. “Very low amounts were quoted in recent tenders. We need to be rational – providing high quality services with a low margin is a very difficult thing to do,” claims Ms Sadowska.
“We are not taking on new projects just to increase our portfolio of managed projects at all costs, in order to build what might be an impressive index of the area under management but below the break-even point. Moreover, it is typical during a downturn for facility owners to act under the pressure coming from tenants who demand a reduction of the rates paid to management companies,” adds Grzegorz Dudziak, who emphasises that in his opinion the market minimum has already been reached.
Iwona Laszkiewicz also believes that the current situation cannot last forever, because employing property managers itself requires significant expenditure. “Property managers have always been in demand on the job market, so consequently their remuneration, even during the crisis, has been growing. On top of this there is a more important issue which the owners of buildings should bear in mind. In the long run counting the proverbial pennies will not achieve much. A fund which buys a building in order to sell it later must be aware of the fact that one result of lower management service levels is a fall in the value of the facility,” argues Ms Laszkiewicz.
Work for everyone
Is there still room on the market for everyone? “The crisis on the global markets in the last two years has caused a significant suspension of projects on the local commercial property market,” believes Michał Skaliński, the director of the asset management  department at Cushman & Wakefield. But as he points out: “The density of shopping centres in  Poland is below the EU average, with 180,000 sqm per 1,000 inhabitants – and the average in the  EU is 220 sqm. The development forecasts for the next few years indicate that the commercial property market in Poland will mature.” In his opinion there should be no shortage of work: “The appearance of new projects will force the modernisation or re-commercialisation of older facilities in order to justify satisfactory rents. This is connected with the evolution of shopping centres, which are continuing to improve their quality and the scope of their services,” he adds.
“New players without a portfolio or experience often make bids to manage properties – sometimes prestige projects – by offering unprofitable rates for their services. At a certain point the headquarters of those companies that offer property management services at the lower limit of profitability will remind them that each business has to at least break even in the long run, not to mention make a profit,” claims Grzegorz Dudziak of DTZ, who believes that the market will normalise in the new year. Iwona Laszkiewicz of King Sturge is of the opinion that as the economic climate improves companies will not close down their property management departments, but will instead focus on the development of high-margin services. “Property management, which played a leading role in the crisis years of 2009 and 2010, is having its fifteen minutes of fame at the moment,” concludes Grzegorz Dudziak.