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Office Management, Kommercheskaya Nedvigimost, №1, 11th of January 2006

The new business appeared at the real estate market – the managing of offices.

With the growing of volumes of capital market of office estate we observe the increasing of professional level of its players. This is an appropriate process, because the need of modern customers are always growing, the constant coming of European and American companies into Ukrainian market makes the management of Kiev business-center pay more attention of the quality of services, inculcate the world standards into their activity.

The representatives of leading companies speak about the capital real estate.

— How developed is the market of managing companies (MC) services for office estate?

— I think my colleges agree with me, that the market is just formatting. As a rule, the MC is created by investors, which have the experience in construction and exploitation of office center. The development of the MC market may be fastened, it the Russian companies enter the Ukrainian market. The Russian companies have already a good experience of managing the office estate. The benchmarking (process, when the new companies borrow the experience of the leaders) will be very important for these kinds of services. The MK should be attracted to the job at the stage of object’s projecting. This approach allows avoiding the mistakes, which may appear during the exploitation process.

— It’s really so. The managing of real estate is a new service for Ukrainian market of commercial estate. However the owners of office estate show the big interest to it. The market of managing the estate is now rapidly developing, but many people still don’t have any idea what is that. Some owners of the office centers prefer managing their actives just by themselves. These enthusiasts rarely go out of the borders of the technical exploitation and usually don’t pay attention at the economic side of the managing – increasing of profit.

— The effective managing of real estate is also important, as the realization of new projects of development. The imagination of effective management may be described as “managing of actives”. Even though that it may seem more comfortable for the beginners to hire the staff for managing the buildings, most of the developers manage their buildings just by themselves – not only to save the money, but also to establish and maintaining the good relationship with lease-holders.

As the Ukrainian market of professional office centers is still young, so is the professional management. Some developers actively offer their services in the sphere of managing the actives to the owners of the real estate, for example to the pension fund. The others widen their activity in this sphere, while buying the existing buildings. The managing of actives allows softening the consequences of reducing the development of new office buildings, at the same time contributing to the growing of the number of lease-holders, which the developer is working with. If the company-developer effectively manages the real estate, it can provide the demand on new projects owing to the attraction of its own lease-holders, which need the new office premises.

— The chaotic state of construction of the commercial estate doesn’t go along with the structured and professional service of office objects. The short-termed profit is a priority for today, because it reduces the attraction of companies which manage the commercial estate objects. About 95% of the office premises are managed by their own structures. This is a tendency, when the owner isn’t interested in investing a part of their money into the control of the third company.

— Lots of the companies, which build their own buildings in Ukraine, don’t treat them as their own active, the good condition of which should be kept for a long while. That’s why the managers’ services are needed after putting of objects into operation. As a result, the owners have losses, because the equipment turned out to be bought from different suppliers and don’t correspond to the single standards, etc.

The general opinion is that the professional managing of building starts at the stage of preliminary construction. The obligation of management is to study the condition of market and to define the circle of lease-holders, to create the advertising company of the object and to define the optimal proportions of premises for rent. You should define the terms “managing company” and “exploitation company”, because the company don’t provide the full complex of services. The situation is also possible, when the owner of office building manages the object, they also deal with the financial management, and the MC is attracted just for exploitation. The big owners of office estate treat the MK carefully, because of the certain privacy of financial streams and the possibility of getting the profit from the self-exploitation of the object. This is connected because of the certain confidentiality of financial streams and the possibility of getting the profit from the exploitation.

However it’s evident: if the MC offers a full spectrum of services concerned with technical exploitation and commercial management, the company-client can completely concentrate on its business. As a result, the business-processes are done on the high level; the comfortable and safe conditions are created. The managing of real estate in Ukraine is treated as some kind of additional activity. The management can’t be professional, because it’s not considered to be serious. Moreover, they often save money on it.

Managing of office estate is one of the most profitable businesses in the sphere of real estate. Even though there’re no professional managing companies in Ukraine, it is. At the moment the owners of the building hold back the development of this sphere by creating their own departments, which serve the business-centers. However, according to the specialists’ opinion, the situation will change and the professionals will be preferred. At the moment the Kiev market of managing companies stays at the stage of its formation.

— Which situation do we have at the practice: the owners of office centers prefer creating their own structures for managing of real estate or invite the others specialized companies, if they have such a chance?

— As for me, I’ve noticed such specificity: the owners of office-centers invite the professional MC, which work according to the international standards. The owners of office centers of lower class often try to manage the building just by themselves, what doesn’t lead to the desirable results.

— The owners of office estate often prefer managing their objects just by themselves, concluding the contracts with a couple of subcontractors, which solve all problems. Considering, that almost all technical systems of the buildings are connected (for example, air conditioning, service lines, heating system, computer lines depend on the electricity; the breakdown of water supply system may lead to the dysfunction of electric systems and breaking the security equipment), it’s more profitable and reliable to put all the responsibility on the experienced company. Even if it can’t provide the whole complex of services, it may do the role of general subcontractor. While renting the building to a couple of lease-holders, there’re lots of troubles, connected with exploitation question, different risks increase. That’s why it’s better for the owner to hire the MC, which will be responsible for that.

The world practice shows, that the owners of office estate usually conclude the contracts for complex managing of the building. It has two reasons: the necessity to work with experienced MC and wish of the owner to concentrate on their own business, because the owner of the building is usually the investment or any other company, the main field of activity of which is too far from the office estate market.

— At the same time the number of office estate owners, which would like to hire the MC, is growing. They mostly don’t do that because of their hesitations: if the MC can build the work of the office center properly. This problem is caused by the lack of development of the MC services market, and also by unknowing of parameters, which would help to estimate the quality of these structures work.

Later more and more owners of the office centers will decide to get the MC to manage their property. This will be the most rational decision. The mover of this tendency will be the further satiation of the office market with investors, which don’t consider the real estate as their main business, but they are attracted with the higher profitability. These companies will need the professional help.

— Today the construction of commercial estate objects has moved to the new level. That’s why if the object is done considering all construction rules, you’ll not have problems with putting it to the operation. While exploitation of the buildings, the question connected with technical equipment, maintenance and repair are raised. It may concern the heating system, the ventilation system and air conditioning, water supply and sewerage system, fire safety, etc.

To solve these problems you need to attract the professional MC, which has different departments, including the technical supply. This company may also provide the effective economical management and control of the whole complex.

Creating of its own MC make sense if its owner is a specialist in developing business and is going to build at least 2-3 more objects and serve these objects further. It’s unprofitable to create this structure for one commercial estate object. It needs attraction of huge resources, which is very unprofitable to waste in this case.

— We don’t have the developed property management in Ukraine. However there’re some companies, which service the office objects together with the owners. Basing on the previous experience, the company has a high potential to be essential in the sphere of property management.

— The owner of lease-holder, which wants to get a maximum profit for minimal expenses has a choice: either to create their own managing department or hire the MC. Considering the complexity of the tasks, creating of their own service is justified in case of profiled business: lots of MC enter the holdings, which work in the other directions of the real estate market. In the other cases the owner would rather hire a MC.

There’s a clear tendency to develop the facility management in Ukraine. The real estate costs not much, if it’s not functional, if it needs much expense on repair or if it’s not profitable. However the MC are ready to go further. Considering the principle “it’s cheaper to warn than to remove”, they are ready to offer the facility engineering – managing of real estate at the stage of projecting. Soon the potential owner will want to get the whole package of high-professional services and real profitable financial instrument at the same time.

The lease-holder may use the services of MC or hire the company by itself. If the lease-holder rents the whole building, they may hire the MC just by themselves. These lease-holders often move to the new place with their own team, which worked with them earlier at the previous place. In the other cases it’s better to use the services of the company, which work for the owner. The lease-holders always want to pay just once and get the best services for their money. The most optimistic decision it this case is managing of the areas of lease-holder and owner by the exploitation company, which is able to control the global systems in the building.

The MC may offer two forms of cooperation – management by warrant or managing of the property to the benefits of the owners. In the first case the owner will get the fixed amount of annual profit from the object, in the second case the MC work for the percentage of the renting payments. Then the MC is sure to be interested in increasing of money got by owner for holding the biggest rent. However the owner has its own profit if the management by warrant is chosen. The specialists of the facility management state that it’s necessary to start working with the MC at the stage of construction. It’ll allow building the technical conditions for the individual necessities of each lease-holder.

— Which standards should have the professional MC? Which is the set of services it should do to the owners and lease-holders of offices?

— The management means all the cares, connected with exploitation of building and creating of comfortable conditions for its lease-holders, and also getting profit from this kind of activity. During the managing the own managing apparatus of the company is formed, the business-processes, which allow effectively manage the object, are putting right.

Here is the standard list of jobs connected with management:

• Control of the quality of construction
• Forming of managing company
• Providing of administrative and renting policy
• Providing of inner and external cleaning
• Accounting
• Organizing and leading the proper exploitation of the object
• Coordination of technical service works
• Maintaining of equipment and technical remedies in good condition
• Running of data base of communal payments
• Removing of emergency situations, breakdowns, equipment deteriorations
• Maintaining of cleanliness and sanitary rules at the object
• Financial and bookkeeping service, including the using of created schemes for taxing optimization
• Organizing of security measures and object services

The main functions are the technical exploitation and cleaning of building and also the security organization. The owner may also include the specific orders to the list of responsibilities, for example, managing of warehouses, gardening, etc. The widening of responsibilities is explained because each object, which is taken for managing, is unique, that’s why its service is also unique.

The others managing jobs are:

• Supporting and control of object construction
• Technical exploitation of sanitary engineering and premises of the building
• Cleaning of premises and adjoining territories, including parking
• Organizing of reception
• Providing of security
• Organizing of food service
• Running of accounting
• Managing of relationships with lease-holders

Except for the traditional services, as the exploitation and maintenance of building, some MC offer the services of searching of lease-holders, supporting of projects, and also the consulting and promoting of objects at the market, beginning from the marketing research and finishing with the creating of object design within the original conception, systems of advertising program, planning of the whole system of marketing communications.

Different buildings have the different requirements of management depending on the technological complexity of elevators, conditioners, automatic systems, the qualitative and quantitative compound of lease-holders, terms of lease and other aspects. In the multi-stored shopping mall, which has the whole set of trade equipment and inhabited by dozens of lease-holders, the necessity in hiring of MC is evident.

— The main criteria of professionalism of MC is ability to keep to the international standards in their activity, taking into consideration the specificity of Ukrainian market. The package of services, which is offered by MC, is always individual, is created for each object separately and depends on the class of office center, its size, the level of lease-holders, tasks, set by the owner.

The activity of MC is aimed at the technical managing (maintenance, quality control of construction, technical exploitation of the object, cleaning and organizing of food service and security service, etc.) and economical managing, which means accounting on the object exploitation, regulation of relationships with lease-holders, consulting, etc.

— The loyalty, high number of leaseholders and low level of rotation of lease-holders are provided by additional services, which correspond to the necessities of each certain lease-holder or the team of them. The additional services for IT-companies, which may “connect” it to a building for a while, may be:

• Access to some network operators
• Good ventilation system of service premises
• Networks, which provide the high speed of traffic
• Reserved electric supplying of building etc.

Because of the lack of development of our office centers management, lots of capital office centers don’t get the services, which are essential for the European markets: copying services, caf? and restaurant chain, selling of stationery and other goods etc. By the way, the cleaning, re-planning and repair should be also provided according to the necessities of lease-holders.

The main kinds of MC services are:

• Exploitation service
• Security
• Paying for public utilities (electricity, heating system, air conditioning, water supply)
• Daily cleaning
• Maintaining of fire and security alarm
• Removing of snow and ice in winter
• Maintaining of boiler-room
• Fire-extinguishers in the public places
• Providing the lists of lease-holders
• Removing of trash
• Compensation of expenses for premises security

It’s also expedient to provide the additional services for additional payment (for example, once a month, depending on the frequency of using):

• Organization of seminars and conferences (using of conference-hall and organizing of meetings – from $1,75 for a person per hour)
• Organizing of video- and press-conferences
• Rent of presentation equipment

— The managers will have the European standards with slight changes, caused with the specificities of Ukrainian market.

The set of services is told by the market, its main parameters are:

• Promotion of the project: advertising, PR
• Constant contact with lease-holders
• Gathering of rent payments
• Managing of exploitation
• Juridical support
• Accounting support
• Technical support
• Safety of the object
• Increasing of market cost of the object
• Regular and accessible accounts

— Managing of commercial estate is getting the biggest profit from square meter by means of financial management, which do the formation and managing of financial streams.

First of all, the main task of MC is saving of owner’s money by optimal line exploitation. The term “facility management” isn’t still translated in Russian. In general meaning it means total managing of real estate. The role of the MC is not only to maintain and exploit the building, but also in doing of managing functions, as leading of renting contracts, searching for new clients, gathering of payments, insurance and managing of risks, checking the development of real estate market etc. These functions are aimed at the fulfillment of the owner’s goal – getting the biggest profit out of the real estate.

The other functions of MC are taking part in the strategic planning of object exploitation. The building may change its functions, infrastructure, may be re-built. Making a proper decision in the direction of facility management prepare the owner to the following exploitation of events.

— Which structure of office MC is optimal?

— The most optimal structure for MC is matrix; it’s adapted to providing of reaction on non-typical situation and constant increasing of workers’ professionalism. The matrix structure also provides the most optimal structure of expenses.

The three main tasks of professional management are:

• Managing of technical exploitation of real estate object
• Commercial managing of the object
• Managing of marketing activity

Considering this factors, the optimal structure of MC is:

• Managing director
• Rent department
• HR-manager
• Juridical department
• Informational technologies department
• Construction and architecture department
• Technical maintaining department

— In my opinion, the optimal MC should have the following main departments:

• Administrative office – management, company development
• Central dispatcher office – the 24-hours receiving and processing of express orders, removing of emergency situations
• Maintaining of engineering systems and service lines – exploitation of engineering systems and service lines of the building
• Infrastructure service – providing and organization of receiving service, phone commutator (call-center), delivery service, managing of inner staff, full spectrum of external warehouses services, central archive, liquidation of private documents, re-planning and re-decoration, greening, fito-design and care of adjoining territory, organization of moving, removing of snow, roof exploitation, ecological and sanitary control, removing of trash, etc.
• Commercial management and consulting – managing of financial activity

—Which capital or regional office center was managed the best, in your own opinion? Which MC would you name as the role-models?

—The real quality of services may be estimated after “living” in the building for a while. More over to find out the disadvantages of the management, you have to know “what is good”. For example, the cleaning of proper managed office finishes at 9 a.m. If necessary the lease-holders may call the cleaner any time during the day.

As a good example of office building management, I would name the Kiev Horison Tower.

—Amongst the international leaders of real estate managing I’d like to point out the following companies: Hines, Enka, M+W Zander, Sawatzky (Moscow), Dussmann Gruppe.

—The reputation of the companies, which rent the premises in business-centers, forms the reputation of the center. I’d like to emphasize on the business-center Artem (class B+). It’s rented by US Embassy, Great Britain Embassy, Yamanouchi, Raiffeisen Investment, Aventis, Adidas, Robert Bosh, Renault Export, Mary Kay. The management of the business center is done by Property Management. At the moment Artem may be called one of the best buildings from the view of safety.

—How can you define the cost of MC services?

—The main criteria of estimation is a level of fulfillment of office center. The level of payment depends on the size of money stream, sum of money lost because of non-using of premises, coefficient of lease-holders’ rotation, which depends on the level of their satisfaction with services quality.

The other parameter for MC services cost estimation is the higher than average rent.

—There’re two variants of payment. The first one is when the lease-holder pays for the management, this is the operation expenses, which include the payments for public services. They are from 5 to 10 dollars for one sq. m in average. The second variant is when the owner pays for the building. This is about 12-15% from the lease and other profile monthly payment. The cost of managing services is very individual and always depends on the certain object and tasks of the owner: from the size (more size – less price), the quantity and complexity of equipment, level of lease-holders and rent payment, general volume and character of services, done by the managing company.

—The MC usually uses one of the two systems of relationship. The first one is proper for the big multi-functional companies with the big number of departments. They conclude a treaty directly with the owner of office center, who pays for all the exploitation expenses. The owner concludes treaties with the lease-holders and gets the all payments from them. The second variant is a system of three-side relationships, when the MC concludes treaties with the owner (for managing) and with the lease-holder (for serving) at the same time. In this case the lease-holder pays the rent to the owner; they pay the cost of public and exploitation services to the MC. These payments allow paying the salary to staff and hire the subcontractors. The MC also makes money on additional single or seasonal services, which needs the lease-holder.

The exploitation expenses consist of the expenses for building exploitation and public services (they are counted by the fact of consumption) and payment to the managing company. The size of payment generally differs depending on the area, class, the brand of MC and the cost of its services. The reward of the MC for fulfillment of its obligations is about 10-15% from the cost of exploitation expenses.

While defining the cost of treaty lots of parameters are included, and each time the most proper variant is chose. The size of payment is counted based on a price of one sq. m of office premises, and also depends on the condition of the object and may be presented just after the checking of our employees.

—The amount of payment depends first of all from the gross revenue of lease. Correspondently, it depends on the rent payment, general area of the office center and class of the building, quantity and complexity of technical equipment of office center, number of lease-holders, etc. The size of payment also depends on the tasks, which the owner stands before the managing company and the volume of services, done by MC.

The agreement between developer and MC should strictly define the obligation and responsibility of each part. The contract about the management may foresee the responsibility for covering of certain expenses, the right on existing of advertising activity and running of bank agreement and agreement about management by warrant. Besides, the contract also speaks about rules of running the accounts, insurance questions, compensations, hiring and management compensations. The last one is counted from the gross revenue, which monthly go on the lease contracts (both new, and renew). The amount of payment is between 1% and 6% from the gross revenue of rent.

—The cost of rent includes the rental fee and operation expenses. It means, when the lease-holder is interested in the final number of lease, it’s the rental fee and operation expenses. The rental fee includes the right of using the areas and staying there in accordance with reached agreements. The operative expenses are the second part of the payment, which usually includes the lease-holder’s expenses, connected with the functional elements of building. This is a technical exploitation and infrastructure management (cleaning, providing of safety, receiving service, food service, landscape design, centralized service of purchasing, greening, information service, etc.). Except of these, the operation expenses include the insurance expenses, property taxes, rent of the land and public services. The cost of these services should also be included to the operational expenses.

The amount of reward depends first of all on the expenses on service organization. This is the most expensive part of the price and is approximately 2/3 of the cost of the services. The 1/3 is a profit of MC. The rational price of services is between the amount of operational expenses and the volume of expenses for the service.

The profitability of business directly depends on the number of “squares”, which are under the management. The bigger is the number of actives managed by the company, the lower are the expenses.

The calculations show that the big managing company may be interested in any premises with the area more than a thousand of square meters, because it has a possibility to use the exploitation services not only for this object. If the object is the single one, in my opinion, it’s interesting to manage the building with the area no less than 20 thousand sq. m.

This type of activity still has a relatively low profitability. According to different estimations, the leading managing companies are satisfied with the fee of 15-25% from the annual profit, which is get from real estate objects. A lot of things depend on the durability of the contract and on the class of the building. Today the terms of contracts are from 3 to 5 years. While concluding the contract for 5 years, the profit of managing company is about 10-13% from the cost of contracts. Besides, the professional management is justified in the buildings of A and B class. The lease-holders of the buildings of low quality count on the low rent fee and correspondently on the minimum of included services. That’s why the job of managing companies in this segment of market is low-profitable business; it’s not attractive for western companies at all.

— Which advantages gives the cooperation with professional cleaning company to the MC? On which factors depends the cost of the services?

— The cooperation with cleaning company provides the saving of money and time of the customer and simultaneously increases the quality of cleaning. The “Clean World” was created in March 1994 as a company specialized on cleaning and technical serving of buildings (facility service). In 1998 as a result of successful development the company gathered a group of enterprises, which work in Russia, Ukraine, Belarus under the single name Chistyj Svet. At the moment we have about 5 000 employees. The company has its departments in Kiev, Dnepropetrovsk, Donetsk, Kharkov, Odessa, Zaporogje, Vinnitsa, Kremenchuk, Moscow, Saint-Petersburg, and Minsk. We offer services in the sphere of infrastructure service, commercial management and technical serving of real estate.

The services on the complex cleaning of premises and external territories include the maintaining, general and mail types of cleanings. Besides, our company does the set of other jobs, connected with serving and maintaining of infrastructure: washing of windows, fa?ade, care of the stone, removing of trash and snow, supplying with support consumables for bathrooms, creating, inculcation and maintaining of dirt-protection systems, disinsection, deratization, improving of territory, and greening.

The company has its own processed methodic of technical exploitation of buildings, which allows considerably reducing their natural deterioration. It’s based on the complete priority of preventive measures of all systems of the building: electrical, sanitary engineering, heating systems, ventilation and conditioning, automatic, fire and security alarm, and also rational using of all kinds of resources. As a base of the system organization we consider the aspiration to do the complex of high-quality services.

The cost of the complex services includes: salary of staff, including taxes and social payments, amortizations, detergents and support consumables, repair of equipment and cost of depots, administrative expenses, taxes, and also the profit of the company.

While calculating the cost of services, the additional requests of the client are also taken into consideration. For example, the customer may create the age threshold for staff, certain brand of equipment or support consumables for bathrooms. Correspondently the price will be higher compared to the office center of regular class. The quality of services leaves the same.

Iryna Kladko, the marketing specialist of Shaden Group:

—Before attracting of professional cleaning company to the work in the office center, the customer can check, if the quality of its services corresponds to the cost of the services. The serious cleaning companies often do the demonstrative jobs. Working with the cleaning company, the client doesn’t have cares, connected with the purchasing of expensive cleaning technique and chemicals, training of staff. The cleaning company is ready to solve all questions like that, by making a schedule and discussing it with the client.

The cleaning company is able to present to the lease-holders and administration of office center a very wide spectrum of cleaning services:

• Daily cleaning: the workers of the company clean the building from the inside and outside by means of dry mop-system and wet mop-system. It can be done early in the morning (in the shopping malls) and late in the night (business-centers).
• Maintaining cleaning: removing of accidental pollutions, which may appear during the work of object which is served. To create the comfort for customers of business-centers and provide their non-stop job, we discuss the location of staff and cleaning equipment. We also do the local cleaning of public places (fire stairs, technical premises, etc.)
• General cleaning. The employees of cleaning companies (mobile team) do the careful cleaning of different surfaces by means of floor-cleaning machines, high-pressure apparatus; we do the careful cleaning of bathrooms and crowded places. The big attention is paid to the escalators cleaning, wiping of dust on the interior details, careful cleaning of hard-to-reach places, where the unnoticeable dust accumulates
• Single works. It includes the general cleaning and lots of other specialized works (the spectrum is pretty wide)

Each our client may choose a comfortable type and schedule of works for themselves.

The main parameters, which define the cost of cleaning company’s services, are:

• The spectrum of services done
• The number of service staff needed for jobs fulfillment
• Area of office center (the volume of jobs done)
• The number of technique and equipment needed for cleaning
• Chemicals used

The Shaden Group creates the individual offers for each client, considering all requirements and requests of the customer, that’s why it’s possible to speak about the individuality of each order.

The class of office center makes the owners responsible for its careful cleaning. If the daily and maintaining cleaning is enough for regular office premise, the business center of A-class needs a daily general cleaning done by the qualified service staff, who look perfectly, with professional technique and chemicals.

Source: “Kommercheskaya Nedvigimost”

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