property portfolio

You need a professional property manager

Many people misunderstand the role of the property manager, thinking that the role does not extend beyond the collection and remittance of rental receipts and acting as a buffer between the landlord and the tenant. Little do they realize that a good property manager will generate a greater return from their property portfolio and enable a long term portfolio strategy to be realized. So what should you look for in selecting a professional to manage your property(s)?

Well, first of all, you need a professional who is experienced in the market. Not just any market, but the Dubai market. Typically, if you find somebody with at least 10 years of experience, you would find somebody who has survived the global recession, and that should provide a reasonable indication that they are in the business for a long time and that they had the skills to navigate and survive Dubai’s property slump. Many didn’t.

A competent property manager will provide a whole host of services for you but the most important is the development of a Property Portfolio Strategy. Your chosen professional must be able to articulate and present his thoughts after conducting a thorough assessment of your personal situation and property portfolio. He must be able to provide you with a credible strategy and activity plan which is designed to harness the true potential of your property and provide you with the maximum rate of total return. It is essential to have a well thought out strategy for your property portfolio if you are to maximize your returns.

Not just anybody can formulate a credible and implementable strategy. It requires years of expertise and a fundamental understanding of what makes Real Estate such a worthwhile and superior investment. A true professional will have a strong knowledge base on topics including industry history, current market factors and trends, risk factors, and the likelihood of relevant future events that will affect the performance of your property investment. This knowledge should span global, regional and local landscapes and will require a good understanding of economic factors, industry knowledge extending to government policy and regulation, finance and market dynamics.

Forming a strategy is one thing, but being able to bring the strategy to life is quite another. You will require an activity plan which will include details of pricing and marketing, customer relationship management and tenant management and policy for the entire portfolio. Essentially, this area of expertise is related to the “topline” or revenue generation and management of the property.

Equally important is the cost management and maintenance supervision of the property. Many times, I have seen excellent “topline” performance being eroded due to poor operational and maintenance cost controls.

Managing your property portfolio will also require proper performance measurement, communications and review schedules, and status reporting and financial statements. You should always seek examples of these elements as transparency and candid performance appraisals are essential for managing your portfolio correctly by addressing shortfalls to objectives, issues requiring addressing and opportunities for performance improvement, in addition to your peace of mind.

You also need to choose a property manager who you can work with and who, you believe, has your best interests at heart. Your property manager must be a customer centered and, unfortunately, in this business, this is not always the case.

There is no point entering a business relationship that is lacking in mutual trust and respect. You must have confidence in his ability to manage a business… your business… which just so happens to be a property portfolio. As with all investments, but especially investments in property, there will be good times and challenging times. There is no such scenario as “set and forget”. It doesn’t exist. If you do not respect the manager you have appointed, the relationship will not survive the challenging times and you will need to go through the whole process of finding a replacement. So take your time but invest your time to your benefit. Be sure to ask for referrals and call some existing clients. Seek out success stories. Ask to see examples of client reports and so you can have an idea of their completeness, continuity and timeliness. Ask your property manager carefully thought out questions to enable you to gauge the depth and breadth of knowledge that he possesses.

Ensure that the organization you are dealing with has the resources to support the manager of your portfolio. In these times of eliminating overheads, individual performance can be inhibited because of a lack of organizational support. You should ask to meet the team.

Finally, remember, it’s your investment, and you need to ensure it’s in good hands providing you with the returns you expect with as little hassle as possible. Once you appoint a property manager, your ultimate return on your investment is largely in his hands. Choose wisely.

 

Managing your property portfolio will also require proper performance measurement, communications and review schedules, and status reporting and financial statements.

Property portfolio resilience through diversification

PROPERTY PORTFOLIO RESILIENCE THROUGH DIVERSIFICATION

By Mohanad Alwadiya
CEO, Harbor Real Estate
Advisor & Instructor, Dubai Real Estate Institute (DREI)
Published in Property Weekly

It’s true, when people say “the world keeps getting smaller every day.”

Communication and information sharing across great distances and involving large amounts of data take place in a matter of seconds, and the devices we use and ways by which we transmit data keep evolving as we speak. Indeed, many human activities have become highly mechanized and are being performed at supersonic speed; though sadly, life is no less complicated. And economics, no less.

Even with the development of sophisticated software intended to calculate risk, analyze data or predict the impact of policies and economic decisions, e.g. ADePT, Minsky, PI+, SAS/ETS, etc., mankind is still at the mercy of structural or systemic shifts that continue to shape and reshape the global geo-political and economic ecosystems.

So, even with all scientific and technological innovations on hand, we continue to face uncertainty. How, then, does real estate investment – a major economic sector affected by such changes – figure? How do investors protect themselves from financial obscurity when the trade winds start to blow in a less-than-favorable direction?

The answer – portfolio diversification.

The advantages of diversifying your investment portfolio across a variety of asset classes such as stocks, bonds, property and cash has been well-chronicled. What most investors don’t understand that diversification within each asset class can also provide significant benefits.

The majority of my clients are comfortable with investing in residential property because most have rented or bought a property for their own use and therefore understand what that experience entails. However, very few have actually had a similar experience with commercial property and, therefore are a little less confident in investing in this potentially lucrative segment of the market.

So, why consider investing in commercial property?

Commercial property can add diversification to a property portfolio. Segments within the Real Estate market rarely move in tandem and a mixture of residential and commercial property can make an overall portfolio more resilient to inevitable market cycles.

All things being equal, commercial properties generally produce an ROI at least double that of residential properties. This is mainly due to lower per-square-foot capital cost but also reflects the higher levels of risk associated with owning commercial property.

Managing tenants in a commercial property is also more straightforward. You will have a business-to-business relationship with your tenant and many of the emotional issues which can complicate residential leasing arrangements won’t exist. It’s easier to keep interactions professional and focused and relationships are built over time with the opportunity to attract a ‘blue chip’ tenant and are likely to rent your property for a long period of time and less likely to default on rental payments. In many cases, commercial tenants and property owner interests are aligned. The tenant wants an efficient operation which presents a favorable impression to his customers, business associates or peers and, in this way, is more likely to assist the owner maintain or even improve the property.

Establishing a true value of the investment is often easier with commercial property. Reviewing the current owners’ income statement and existing lease details will provide a good indication of the likely future cash-flows and help to establish an accurate valuation.  Residential properties are often subject to more emotional pricing or developer inefficiency and cost recovery considerations.

Lease variations abound with commercial properties. The requirements of a tenant operating a high turnover major regional distribution and logistics center for non-perishable goods will be vastly different of those of a tenant who requires refrigerated goods storage to supply local retail outlets in shopping malls. In addition to lease rates and periods, negotiations can include such items as maintenance, implementation of storage and logistical systems, provision of office fit-outs, insurance, lease-to-buy provisions and options – the list goes on.

However, there are some possible downsides that the investor should consider.

Let’s use a warehouse as an example. As most commercial leases are of a duration exceeding two years, with many being of five years duration with options for an additional term of five years, it could take some time to find a new tenant for the warehouse.  Additionally, your current tenant may vacate due to tough economic conditions. Residential property can be resilient when it comes to economic factors over the long term and finding new tenants is not as difficult.

As the lease for each commercial facility can be negotiated with flexibility only limited by law, owning a portfolio with numerous commercial properties can be time-consuming and complicated. You will need professional help if just to handle issues such as maintenance and emergencies. Remember, your clients are in the business to make money and will be relying upon you to address any issues that arise with your property immediately. They, like you, do not want to forgo any revenues or incur any costs because of a problem with the property or premises that you provide.

Purchasing a commercial property of a size that can generate significant cash flow will typically require more capital upfront than a residential investment. Also, as the scale or size of the premises can be huge, unexpected repairs or major maintenance items can also be very expensive. This requires careful provisioning for expenses and emergencies when calculating lease rates and free cash flows for re-investment.

There is a greater array of physical and safety risks associated with commercial properties. Warehouses, for example, are often frequented by trucks, forklifts or other heavy machinery which means damage can be substantial from accidents. Having proper insurance is a must, not only for damage to premises and systems, but also in the event of personal injury or death where you, as the owner, can be held liable. Remember, your investment is actually operating as a commercial venture and can receive high volumes of people traffic.

As usual, greater returns will attract greater risks, however, as part of an overall balanced investment portfolio, there is no doubt that commercial space can be very lucrative indeed.

Portfolio diversification is a time-tested way of recession-proofing your investments by ensuring that not all of your wealth is invested in the exact same asset types, as cyclical economic shifts impact different asset types in varying degrees.