For most businesses the three biggest outlays on their balance sheet are people, technology and property. EC Harris head of property, Paul Foster, observes businesses re-adjusting their focus to maximise financial returns
Across the MENA region today a shift is beginning to take place with investors and occupiers more and more aware of the vital role property can play in a business’ overall commercial performance. Increasingly, a wider understanding is emerging that enhancing asset performance can play a key role in delivering increased capital value and a greater return to real estate investors and the businesses that operate from within their buildings.
At a time when many property values have reduced across the region, taking a more strategic approach to how built assets are managed will build investor confidence and help provide a cushioning against an ever challenging financial climate.
Central to this shift is a growing appreciation of how real estate asset management compliments the more traditionally understood functions of property and facilities management. Building operators across the region have tended to implement largely defensive property and facilities management approaches which focused on protecting their investments on a reactive basis. Nowadays there is a growing awareness that the value of those assets can actually be enhanced by a more proactive approach to asset management.
The dynamics of the current economic environment has been a primary driver in leading many international businesses to re-evaluate their property and facilities management capabilities and their approach to asset management. Sadly however, all too often this has resulted in reduced internal resources, often without being supplemented by outsourced capability, thus failing to improve asset performance.
This lost opportunity in today’s market has never been more important as operators work with lenders and investors to ensure the best possible return from their assets and to ensure their approach is structured to match capital and debt funder requirements.
With liquidity still a major issue in many property markets, including those across the Gulf, developers are struggling to access capital to fund new-build schemes heightening the need to generate more from the assets they already own and operate.
This ability to create additional revenue will be particularly welcome in areas such as the commercial office sector where a saturated market can lead to “zombie buildings” such as those that have been seen in Dubai’s Business Bay area.
These unoccupied buildings become under-maintained and depreciate rapidly in market value, making life tougher for their owners in an already tight market. To counteract this danger, some owners take defensive steps to retain tenants, such as reducing rent or agreeing rent-free periods, taking the view that any tenant is better than none, yet this drop in lease value inevitably sees an overall reduction in the asset’s overall worth.
Many buildings in the MENA region have been built to a global specification in terms of systems, finishes and controls yet outside of a few mature markets, such as UAE, KSA and Qatar, supply chain robustness is often inconsistent and ill-equipped to support the complexity of real estate already built, let alone the aspirations of the schemes being planned and created today.
This raises the threat that not only could these buildings be under-maintained, but their asset value could also diminish rapidly rather than being enhanced. By adopting a more strategic approach to how that asset is operated these risks can be identified from the very outset and appropriate steps taken to mitigate them.
With multiple factors combining to impact commercial property valuations, changes in accounting standards and ongoing liquidity problems are placing property investors under increased pressure. There will inevitably be greater scrutiny of balance sheets and increased pressure on maintaining or improving asset values requiring a more structured approach to improving revenue capture, cost compliance and cost reduction.
When you consider that most real estate should be expected to last five or six decades the benefit of asset management cannot be underestimated. A focus on the whole life costs and capital value of these assets is critical to achieve long-term value to investors.