Many happy returns
Surveyors bring professionalism to an area which could potentially save companies millions, writes Alexandra Pratt
These are tough times for many in surveying, with high unemployment and a property market in the doldrums, but one area of the profession is doing rather well.
Property and facilities management surveyors are critical at times like the present, providing they have the right skills and, increasingly, the right technology.
The new 823m, mixed-used Burj Khalifa tower in Dubai is the latest of several noughties developments to come online, all of which increase pressure to keep occupancy and yields high.
Yet with the stock market in two minds over the value of real estate, and the global financial crisis enforcing difficult lending criteria, investors, landlords and occupiers need to find operational savings, as well as innovative ways of adding value.
Contrary to many expectations, the recession has not seen the fire sales of assets characteristic of previous downturns. The emphasis, instead, has been on strategic management to generate better returns from existing portfolios.
“There really aren’t that many distressed sellers out there,” says Nick Axford, head of EMEA Research at CBRE. “It’s one of the key themes of this particular cycle… sellers don’t want to sell.”
Matthew Cutts, head of Lenders & Investors at EC Harris, the built asset consultancy, agrees: “Where there is debt finance, chances are, banks hold power over assets and the strategy is to forget LTV [loan-to-value]... they won’t put it into receivership unless it’s the last resort. So, yes, lots of distress, but will they come on to market? Probably not, unless they’re in dire straits.”
Active buyers
In fact, not only are there fewer fire sales but it seems there is a fair bit of acquisition going on, too. “Property looks attractive, with yields at high levels… and people are nervous about the prospects for the economy,” explains Axford.
And with a large gap between property yields and government bonds performance, pension funds in particular are “very active buyers at the moment”, says Cutts.
But while the RICS Chart Book for January 2010 says that the investment market has passed a turning point, with yields now beginning to fall and capital values rising, recovery seems patchy at best, with cash the driving force.
“We are still busy [in acquisitions] in three of four locations,” says Cutts, “Germany, France, Poland and London. Where investors do have cash, they can call near bottom of the market.”
Any green shoots are strongly dictated by geography, it seems. “The market is split,” says Axford. “There’s a big difference between the UK and Paris and the rest of Europe. The recovery in values from an investment point of view is stronger in the UK than anywhere else, but an important distinction is the prime sector of the market. It’s about quality of tenant, building and location.”
Perhaps unsurprisingly, given the weakness of the pound and the fact that the UK recovery remains sluggish, increasingly international investors are a force, particularly in the prime office market.
“They’re more focused on London than elsewhere,” explains Axford. “London is liquid and dynamic; you can always sell out of the London market.”
But while those in property management are seeing investment activity and a turnaround in capital values, those managing occupancy and rent are coping with a less rosy picture.
Once again, prime is doing best, with the pace of decline in rents halving in Q3 of 2009, according to the RICS Commercial Market Survey, but as of November 2009, rents were still slipping across the board at an annualised rate of 6.2% (Chart Book 01/2010).
Although, globally, markets have seen a collective drop of 7.7% in office rents (CBRE Research and Consulting ’09), the real stars at the moment are the emerging markets, with the IMF predicting 5.8% growth in Asia in 2010, despite weak exports.
KK Wong, managing director of Zeppelin Property Developments and Chair of RICS Hong Kong, believes the boom is already there, with “historic high prices” reached in Hong Kong.
It’s a picture that Simon Pascoe, head of facilities management (EMEA) at CB Richard Ellis, recognises: “There is a lot of interest in emerging markets – not central and eastern Europe, but pushing further east and south into Africa.”
White elephant
But what about EMEA? With recent speculation that the price per square foot has dropped by £1,000 to £700, is the Burj Khalifa a white elephant after all?
“In Dubai, property values have fallen,” concedes Pascoe, “but there is a significant corporate presence with lots of opportunity. Dubai has invested in physical infrastructure and that’s not going away. There will be opportunities… once it has stabilised.”
Perhaps the continuing lethargy in the global rental market is due to oversupply. Many big commercial developments are coming online now, two years into the downturn.
Yet oversupply isn’t borne out by the figures, which show office completions in western Europe 2006-10 will be 12.5% lower than previous development booms in 1999-2003 and 30% lower than 1988-92.
Many projects have been delayed or deferred due to a lack of finance and weak tenant demand (The Changing European Development Cycle R. Holberton, CBRE), although it will be the end of 2010 before the peak is reached.
“Generally, the 1990s construction oversupply was far higher than this cycle,” says Axford. “The dot com and tech stock boom created a big oversupply that has taken a long time to work through the system.”
In emerging markets, however, the emphasis remains on creating new assets. In China, this is due in part to the poor design and construction technology of older assets, as well as strict government-imposed ceilings on management fees.
“Owners of comparatively new assets are aware of the importance of the facilities management service,” says Wong. He thinks that credit should be given to professional institutions such as RICS which have been advising local industry practitioners.
Formalised guidance
It’s not just Hong Kong that has benefited from formalised guidance, with the introduction of the AssocRICS Facilities Management grade at the beginning of 2010 in the UK.
This followed the publication of the facilities management guidance White Book in September 2009 which, according to Ian Brodie, Chair of RICS Facilities Management Executive Group, brings “professionalism to an area which could potentially save companies millions in efficiencies and strategic management of property.”
As Peter Moore, managing director of recruitment specialists MacDonald & Company notes, “in Q4 2009 we began to see a marked increase in demand for property managers.”
One of the major drivers of this increase has been the demand by large occupiers for property management firms to offer both PM and FM services. However, as Moore says, “there is a relative shortage of PMs and FMs with suitable experience, which is why the AssocRICS grade is so welcome by major employers.”
So how are those working in facilities management saving the millions? Simon Pascoe says there has been general cost reduction across all clients and all sectors, but the big trend in the past year or so has seen corporations concentrating on their core business through outsourcing.
There has also been a move to core business for Cutts, on the investor side of property management. Most of his work now is not just transactional, but about adding value through re-positioning or ‘tweaking’ assets for market.
“There’s been an interesting change… clients now need partners who understand business and have ideas on how to create value,” he explains.
But this will be different in every client’s case, he believes: “You must understand clients’ business plans or you won’t be providing the right solutions. We find we have to ask more questions… it means you are at the heart of a client’s organisation, aligned to their business needs.”
About half of Cutts’ time is spent working with banks, where there are ‘work-out’ options aimed at getting the best value from an asset until the market picks up. These measures could include re-positioning, scaling down developments, or getting the right structure to hold the assets as efficiently as possible by grouping assets together in a mini portfolio.
One relatively new area in property and facilities management is the issue of sustainability. With new regulations being introduced in the UK for all new buildings, green considerations are moving up the agenda, even in emerging markets traditionally more attuned to growth.
“The awareness of global warming, the control on carbon footprint [will] provide a new area for FM,” says Wong.
But Pascoe says the recession has changed things. It is now “about cost reduction without a focus on green investment… it’s more about the strategic procurement of energy.”
It is the pursuit and combination of green, sustainable practice, and the increasing need for cost saving that has made the RICS Ska Rating such a success.
Sustainable benchmarks
Ska Rating is an environmental assessment method focused entirely on sustainable fit out, to benchmark the environmental credentials of a building.
The method has particular benefits during the refurbishment cycle where it can help occupiers improve the building they are in, it can also help landlords looking to increase their sustainability credentials and unlike the overview of BREEAM, Ska works on a project by project basis.
“It’s introduction is timely as people aren’t moving around a lot in the current market and in addition everyone wants added value,” explains Tim Robinson, RICS Director of Strategic Business Development.
“The real benefit of the Ska Rating is it’s flexibility. It can be used informally and free by a facilities manager who is managing a fit-out project and wants to benchmark the work against the rest of the industry. Property managers can recommend the rating. Equally, it can be used formally, particularly if the occupier wants to use the sustainability label,” says Robinson.
Furthermore, Ska is flexible based on the scope of the work – it scales, whether you’re working on one floor or an entire building.
The first project to be formally certified using the Ska Rating was the fit-out of two floors of 20, Gracechurch Street in the City of London, UK (see images right) – a new 3,700 sq m headquarters for RFIB Group, an international Lloyd’s insurance and reinsurance broker by consultants Pringle Brandon – it achieved a Silver Certificate.
“The Ska Rating was implemented once the project was underway”, explains Kevin Goldsmith, Pringle Brandon project manager and Ska Rating and BREEAM sustainability assessor. As products and finishes were specified, the design team worked closely with the client to select those which had good environmental performance.
“Ska ensures the long-term viability of a building. Managing agents use it as it provides guidance to tenants. Occupiers benefit from being able to declare the added value, CSR and employment benefits,” says Goldsmith.
Another trend that is increasingly taking hold of PM and FM is property management software that includes accounting systems, is flexible and can cope with large numbers of tenancies.
The popularity of computer-based systems for management is a result of the cost savings they can generate, according to Nic Dodwell, managing director of Grosvenor Systems Ltd, who sell the ‘Propman’ software.
“It’s more efficient, cost effective, and reduces overheads, and greater automation can cut staffing levels, too,” he says. This is borne out by his company’s significant growth over the past two years, contrary to the recessionary conditions.
Surveyor demand
It seems that it isn’t just the right software that is in demand during this recession. PM and FM surveyors are themselves vital “to overall management of corporate real estate portfolios,” says Pascoe.
CBRE’s own figures confirm this, with property and facilities management revenue jumping from 14% of total in 2006 to 38% of US$4.4bn in 2009. This growth isn’t limited to recession stricken western nations, either. Wong sees an almost unlimited future for FM in the emerging markets.
“The increase in wealth in China may mean that the Chinese would be active in acquiring assets overseas, and hence asset management would then be borderless.” Matthew Cutts agrees that PM and FM have a strong future through the recession and beyond.
“From a RICS perspective, there are great opportunities if you have core disciplines… [but] they need to be applied to the particular business need of the client. As a client-facing person, I’m optimistic. Opportunities are harder to find, but they are still there. The size of the opportunities are larger, as we are talking about frameworks and clusters of deals.”
He does, however, sound a note of caution, particularly for those working in the London market, at the heart of which lies the financial sector. This has been under attack recently, but the property industry relies on it.
He believes that the property sector should recognise that relationship, support the financial sector and retain competitiveness, “otherwise clients may move overseas.”
So, despite the crash in commercial property markets worldwide, it seems that in some sectors, locations and emerging markets, the corner has now been turned. Yet across all of these wide variations, the most eye-catching development is the success of property and facilities management.
The skills and professionalism of the PM and FM disciplines are now being rewarded, not just with satisfied clients and high revenues, but in the development of the disciplines themselves, which will be more and more important as global markets continue the struggle out of the current financial crisis.
Further information
www.rics.org/facilitiesmanagementpg
www.rics.org/commercialmarket
www.rics.org/associate
www.rics.org/ska
www.cbre.com
