Struggling with Stagnancy
Tactics for staying profitable when prices are at a standstill
By Daniel Morales
Property managers may want to consider adapting a phrase from Leo Tolstoy when reflecting upon real estate markets: All happy markets are alike; every unhappy market is unhappy in its own way.
|“The government is concerned about the price of houses. They take speculation very seriously.”|
|-Edward Kim, CPM, CEO of REM Asset Management Co., Ltd.|
Each country and region has its own unique situations that create obstacles and challenges leading to stagnating or decreasing prices. Many of the strategies used in response to these challenges, however, can be replicated around the world.
In South Korea, for example, IREM Members are finding challenges with the government’s policies limiting real estate markets. Prices shot up between 2016 and 2017 but have stabilized since mid-2018, challenging the property management industry. “The government is concerned about the price of houses,” notes Edward Kim, CPM, CEO of REM Asset Management Co., Ltd. in Seoul. “They take speculation very seriously.” Illustrating just how seriously, in April 2019, the spokesman for South Korea’s President Jae-in Moon resigned after being tied to a speculative real estate development.
In Osaka, Japan, there has been a split between sales and rental prices and a struggle with some property classes. “Purchases and sales have had a sharp increase, but rental prices are decreasing,” says Chizuru Isobe, CPM, director at A+ Property. “This is especially true for office buildings in Osaka, where rental prices have been decreasing and vacancy increasing, with the exception of Class S and Class A properties.”
|“For office buildings, we subdivide them and increase the price per square meter.”|
|-Chizuru Isobe, CPM, director at A+ Property|
In South Africa, residential, retail and commercial prices have been depressed and unstable over the past two to three years due to domestic political uncertainty. Property managers face challenges with electricity shortages, rising unemployment rates and inefficient local services. “Within the last 12 months, there’s been quite a major pushback by tenants,” says Tumelo Ramushu, CPM, portfolio manager at Mowana Properties.
What strategies have these managers adopted to make properties more profitable for their owners when prices are stagnating?
A Simple Solution Can Be the Best Solution
Ramushu notes that sometimes a simple lease audit can help improve recoveries: “You find that some lease agreements, especially if there are addendums, have not been loaded correctly by administrators into the database that generates monthly statements.”
|“I believe the property management professionals and landlords of older properties may face increasing pressure to update and renew properties in order to compete.”|
|-Winson Chan, vice president of Sales Development
A technical audit on a shopping center, for example, revealed that of the 30 to 40 tenants being supplied with air conditioning, 10 to 12 percent were not being charged for its use, despite the cost being included in the lease agreement.
Ramushu recommends evaluating leases once or twice a year to ensure that correct charges are being applied. “This way, you are not necessarily relying on rental escalations but also on efficient property management to sustain your income demands.”
Think Beyond Your Usual Tenants…
Regarding Korea and Japan, Kim and Isobe both cite adapting the size and style of a property to attract customers from different industries, in order to diversify and stabilize a portfolio. “For office buildings, we subdivide them and increase the price per square meter,” Isobe says.
“Subdividing enables us to attract start-ups.” Start-ups are grateful to rent a smaller space and share resources such as reception space and meeting rooms with other tenants.
In Seoul, Kim notes that property managers have had success transforming residential properties into commercial spaces. “The goal is to switch from a less profitable market to a more profitable one,” he says. “In the old areas of the city, we have one- or two-story housing with traditional roofs and pillars as well as gardens. If we renovate by adding glass and get support from local governments for creator districts, we can transform them into restaurants, a kind of art museum or commercial merchandising stores. All of a sudden these old areas are becoming very popular, which have history and modern structures all together in one area.”
…And Beyond Your Current Location
Property managers in struggling markets also recognize the importance of diversifying assets to other areas. Isobe notes that Japanese property managers look to restructure investments by shifting some assets abroad to growing countries in Southeast Asia such as the Philippines, Thailand and Vietnam, as well as areas of the United States like Hawaii and Dallas.
In South Africa, Ramushu says managers have looked at Finland in the past, notably during the financial crisis of 2007–2008. “The interest in the Scandinavian markets is truly from a yield perspective.”
Utilities have been another major way to save money in South Africa. “Electricity is essentially 40 percent of operating expenses,” Ramushu says. “Already that tells you that’s one of your biggest expenses and that you need to be looking at it in a bit more detail.”
Property managers are investing in solar panels to harvest sunlight. There are also ways to look into sourcing water locally. “A lot of the shopping centers in South Africa are implementing boreholes,” he says. An assessment helps the property determine whether there is a source of water beneath the property, and a hole can be drilled to access the water.
|“Electricity is essentially 40 percent of operating expenses. Already that tells you that’s one of your biggest expenses and that you need to be looking at it in a bit more detail.”|
|-Tumelo Ramushu, CPM, portfolio manager at Mowana Properties|
“There have also been innovations with greywater,” Ramushu says, referring to water that comes from washing machines, bathroom sinks, car washes and showers and can be reused. While not potable, greywater is cleaned and provided as a cheaper source of water to flush toilets and urinals.
(Turn to this issue’s Sustainability column on P42 for further inspiration on how to manage utilities more efficiently.)
How Else Can You Serve?
Additional services are yet another way to bring in more money. According to Kim, Korean property managers try to provide additional services such as space cleaning, business signs and logos and storage rentals. “We need to find some other sources of income if the rents aren’t going up,” Kim says.
This is true in Japan as well, where Isobe notes that when prices are stagnating, property managers will also let residents keep pets for a fee.
Even in markets where falling prices are not a concern, managers don’t always have it easy. “Supply continues to be a challenge,” says Winson Chan, vice president of sales development at Tridel in Toronto, where the rental market is hot. “I believe the property management professionals and landlords of older properties may face increasing pressure to update and renew properties in order to compete.” Managers have to consider hotel/resort-type amenities, new security technology, green initiatives, keyless entry and automated parcel delivery among other upgrades in order to keep up with the times.
Property managers must remain vigilant and carefully watch the market for developments. In markets where prices are flat or falling, innovations from managers around the world provide valuable methods to highlight the importance of efficient management in maintaining value.
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