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Value for Money – What does that really mean? - 12/04/2006

The dictionary definition of ‘value for money’ is simple – it is a buyer or receiver’s perception of the value or worth of goods or services received.

Our definition is a bit more detailed. To us, things that enhance ‘value for money’ in a property are suitability, location, quality and, of course, price. This article is a look at those key areas affecting value and what it means to owners and investors.

Commercial investment property

Commercial property is an all encompassing term covering retail, office, warehouse, showroom, and industrial, as well as mixed use properties which may contain aspects of some or all of these.. A good example of a mixed use property is a car dealership which also has a servicing facility on site.

Three critical areas affecting value

Managers all agree that the two primary areas that influence the value of an investment property relate to the physical and financial aspects. There is however a third area and this relates to the marketing or product positioning of the property. This is one of the key areas that sets a property manager apart from an asset manager.

A property manager is more like a residential property manager who just collects rent and pays bills. There’s no proactive management of the asset beyond the immediate.

A good asset manager, on other hand, will constantly benchmark investments against comparable properties within the area and within the market sector, even internationally. Ideally, they will be aware of industry trends both locally, interstate and overseas.

In practical terms, there is little international comparison or relevance for a ‘three pack’ industrial property at the back of Underwood or Tingalpa. However, there are aspects of asset management that can collectively translate across the portfolio.

Financial

Most landlords have cashflow as a primary concern. They want their rent in on time. Some actively pursue the maximum rent achievable from the investment property, while others are more concerned about having long-term tenants as that means ongoing and reliable cashflow, even if it means leasing below market levels. Even while renting out below market rates, their property will be achieving some capital growth.

A third set of investors and landlords combine the two and are keen to draw the maximum return and capital growth out of the asset.

Most landlords do the simple things, such as regular invoicing, rent reviews, compliance with Retail Shop Leases and other statutory legislation for the recovery of outgoings, to a satisfactory level. Other areas - including effective cost reduction through portfolio based tendering for utilities, insurance, fire services, cleaning and maintenance - are often paid less attention.

One of those areas, utilities, and particularly electricity, has the most potential to generate substantial savings and thus increasing income. By bulk purchasing the electricity at a reduced cost and on selling to tenants at the official market rates, landlords can increase their profit margin. This can be complex, though, and it is often not the cheapest rate per kWh that is actually the best fit for the investment.

Physical

The physical part of asset management deals with ongoing repairs and maintenance to ensure the smooth operation of the property. This is best done pro-actively rather than reactively when work needs to be done, and that also keeps tenants happy.

Effective practices include timetabling works to occur outside of trading hours, doing maintenance works/repainting so that it is deemed recoverable rather than a capital expenditure.

Marketing and Strategic Positioning

Marketing and strategic positioning is all about the presentation and public perception of the property. The key to the growth of your property’s earning potential is to always maintain a clear focus on where you want to take the property and an understanding of subtle, effective and cost effective ways of achieving that.

Effective marketing strategies can be as simple as changing the look of the investment every few years to keep it fresh and appealing. This can include landscaping, repainting, relocating of signage, a gradual change of tenant mix and, in the case of larger properties, may include either tenant or vendor paid marketing of the complex.

And those changes won’t just be limited to the property. Just as in residential areas, if your property looks good, owners in adjoining properties may also go the extra mile to spruce up their buildings..

The end result is the same. For a small investment in paint and other upgrades, your property can raise more awareness, resulting in better trade for your tenants and therefore the value is strengthened.

But marketing can be a two-edged sword. The wrong choice of colour, poor signage or a scruffy car park can damage tenants’ trade, which could impact on your cashflow.

Owner Managers – Good practice or bad?

You have a vested interest in your property and so you monitor it more closely possibly than a commercial manager. However, you may be too close and saying/doing things to hurt your income.

Pitfalls of Owner Managers:
• Allow lease arrangements to slide and become less formalised over time. This diminishes the security of income.
• Rent reviews tend to be less aggressively negotiated because it is a difficult position to argue. Again the cashflow and realisable value are compromised.
• Maintenance tends to be responsive rather than planned. The result often is greater expense as more damage is done.
• Fire services maintenance is often overlooked. This cannot be stressed enough and the potential for disasters are all too evident.
• Insurance is a key expense on properties yet owners underinsure to help keep costs down. They often neglect to ensure tenants have the correct insurances and again the potential for financial disaster cannot be stressed enough.
• Service contracts for all areas of operation are often more expensive because individual owners do not have the bargaining power to negotiate across a portfolio of properties. This can produce substantial savings, reduce operating costs and improve the real capitalised value of the asset.

Author: Daryl Gallagher-Collins, Raine & Horne Commercial