Real Estate Asset Management Alexander Bosak Bernhard Mayer Hubert Vögel
Real Estate Asset Management Publishers: Alexander Bosak Bernhard Mayer Hubert Vögel
Published by: Europe Real Estate Publishers B.V. Gevers Deynootweg 93 P.O. Box 84416 2508 AK The Hague The Netherlands CompEtenE Circle Service GmbH Jakobergasse 4/3/18 A-1010 Wien Austria Editor: Marianne Schulze Layout and Prepress: Iris Engelmann Stritzl Gesellschaft mbh Gmunder Str. 35A D-81379 München Deutschland Photography: Europolis; AIG Lincoln; Zsolt Batár, Valentin Calinescu, H.G.Esch, Wojciech Piotrowski, Filip Šlapal Printed by: "agensketterl" Druckerei GmbH Kreuzbrunn 19 A-3001 Mauerbach Austria
Contents Preface 6 I. Introduction 13 1. Real Estate Asset Management: What is it? 13 Alexander Bosak / Marianne Schulze 1.1 Definition 13 1.2 Intermediary between user and investor 13 1.3 Extended real estate asset management 14 II. Asset Management in the Life Cycle of Real Estate 19 1. Strategies and Investors 19 Bernhard Mayer 1.1 Strategies 19 1.1.1 Strategies for immature markets 19 1.1.2 Strategies for mature markets 20 1.2 Investor relations / Fund raising 20 2. Acquisitions 25 Bernhard Mayer 2.1 Phases of the acquisition process 26 2.1.1 Identification of the target 27 2.1.2 Determination of and contact with the decision-maker 28 2.1.3 Meeting and raising attention 28 2.1.4 Issuing the Letter of Intent (LoI) 29 Example: Letter of Intent 30 2.1.5 Getting your financing ready 34 2.1.6 Signing the LoI after discussions and amendments 34 Excursion: Bank financing 35 (Klaus Kreuzbauer) 2.1.7 Due diligence 38 Excursion: Share deal or asset deal 39 2.1.8 Start of contract drafting 40 2.1.9 Sorting out the due diligence findings or cancelling the process 40 Excursion: Trigger date and shift economic ownership 41 2.1.10 Signing 42 2.1.11 Work on conditions precedent 42 2.1.12 Closing / payment 42 2.1.13 Implementing the purchase contract and follow-up on warranties 42 Excursion: Forward purchase agreement 43 (Ingeborg Stich)
2.2 Acqusition Targets and Deal Structures 44 Case Study: IP West Office Park, Budapest, Hungary 45 (Ingeborg Stich) Excursion: Development challenges for a long-term investor 48 (Petr Urbánek) 2.3 Own development from the long-term investor's point of view 51 2.4 Summary 52 3. Core Asset Management 55 Hubert Vögel 3.1 A multitude of management terms 55 3.2 Market-related access 56 3.3 Real estate or core asset management 57 3.4 From action to success 60 3.4.1 From strategy to full occupancy think before you act! 60 3.4.2 Focus on the essentials do the right thing! 61 3.4.3 Quality do everything professionally! 61 Case Study: Tenant relations 62 (Babara Humar-Simeaner) 3.5 Conclusion for core asset management 68 Excursion: The hard factors of differentiation 69 Case Study: Nile House Procter & Gamble 71 (Andrew Thompson) 4. De-Investments 75 Bernhard Mayer III. Supporting Disciplines 79 1. Marketing in the Context of Real Estate Asset Management 79 Alexander Bosak 1.1 Misconceptions of real estate marketing 79 1.1.1 Marketing is purely communication 79 1.1.2 Marketing is simply filling up empty space 80 1.2 What is real estate marketing? 80 1.3. The duties of real estate marketing 81 1.3.1 Product expertise understanding your clients' needs 82 1.3.2 Market research 86 1.3.3 Strategy-based project marketing 88 Case Study: Leasing of Saski Crescent 96 (Bartl / omiej Hofman) 2. Project controlling Knowledge Management 101 Sonja Schweitzer 2.1 "Learning from experience" 101 10
2.2 The five pillars of project controlling 106 2.2.1 Documentation 106 2.2.2 Organisation 106 2.2.3 Qualities quantities 107 2.2.4 Deadlines 108 2.2.5 Costs 109 2.3 Organisation of project controlling knowledge management 109 2.4 Tools and outputs 110 3. Business Finance 113 Michael Nindler 3.1 Capital structure 113 3.1.1 Leverage effect 114 3.1.2 Dept capital 115 3.2 Financial market risks 117 3.2.1 Risk of changing interest rates 117 3.2.2. Managing the risk of changing interest rates 117 3.2.3 Exchange rate risk 118 3.2.4 Managing exchange rate risk 119 3.3. Duties and taxes 120 3.3.1 Corporate tax 120 3.3.2 Property tax 120 3.3.3 Stamp duties 120 3.3.4 Withholding taxes 120 3.4 Double taxation agreement 121 3.4.1 Parents-subsidiary directive 121 3.5 Tax optimisation 121 3.5.1 Loans or equity 122 3.5.2 Share deal / double taxation agreement 122 Who is Europolis? 125 About the authors 126 Index 129 11
1. Real Estate Asset Management: What is it? I. Introduction 1. Real Estate Asset Management: What is it? Alexander Bosak/Marianne Schulze 1.1 Definition Whenever real estate is called an asset class, the term management inevitably follows. Meanwhile, there are so many different kinds of management that everyone who is involved in some type of real estate becomes a manager. Whether property management, facility management, asset management, or portfolio management, there are many terms (for a definition and differentiation of the terms, see "Core Asset Management", page 55). The meaning of each term is often unclear. The definitions vary in literature, they differ by author, and even companies that manage real estate on different levels have different understandings of it. Some terms are exchangeable; others more or less overlap. They are often ranked; depending on the perspective, from strategic to operative, or from general to specific. Since this book deals specifically with "real estate asset management", it might be useful to take a closer look at this term. Like "portfolio management", the term "asset management" originated in the field of financial services and carried over to real estate. The general term "asset management", which includes all investment types (asset classes), must be differentiated. To emphasise that this particular asset management only deals with real estate, the term was extended to "real estate asset management". What does real estate asset management mean? It can be defined as the discipline of systematically optimising the returns of entrusted real estate assets by strategically managing them in their total life cycle and value chain. 1.2 Intermediary between user and investor Real estate asset management, or the real estate asset manager not as an individual, but rather as an organisational unit, must be involved in all processes of the real estate. This starts with the decision to acquire a certain property or project. The asset manager has to choose the right (sustainable) products which satisfy the long-term needs of the relevant tenants and investors at the right price, at the lowest transaction costs, in the most tax-efficient structure. Real estate asset management is the discipline of systematically optimising the returns of entrusted real estate assets by strategically managing them in their total life cycle and value chain. 13
I. Introduction It must also be at the right time and in the right market. To fulfil the long-term needs of the investor and user, asset managers must play an intermediary role between both. They cannot just represent the investor's interests, since the success of a real estate investment does not just come from the yield but also from how long the product is able to find users and produces the respective cash flow. If the users are dissatisfied with a building (and in a building), they will not only soon leave the building, they will also communicate this dissatisfaction to others. News will eventually spread that a certain building or other buildings of the same property owner (investor) should be avoided. A vacant or partially rented building, however, costs money and lowers its value when the investment property is to be sold. In other words, a successful investment particularly in times of declining yields depends on how well the "assets" are managed in the user s interests. The statement "all business is local" is still true for real estate even in the times of globalisation. Successful asset management requires keeping your eyes and ears open to the market. Not only must asset managers maintain the buildings as well as a good relationship with the tenants so that they bring in the required returns, they must also centrally manage the assets by continually adapting the tax and financing structure, and by hedging. Locally, they must optimise income and costs in the investor s interest during the operation phase. Therefore, in times when real estate investors have long stopped being active in just one country and/or start to diversify their real estate types, it means that asset management cannot be performed equally from one particular location for all investment locations and properties. Just one look at the legal and fiscal conditions that vary from country to country and it becomes clear that individual solutions are necessary. Different usage types also need a differentiated approach a hotel investment differs from an office building, just as a shopping centre differs from a logistics park. In addition, the markets are also different what is demanded in one market can become a "non-seller" in another. The statement "all business is local" is still true for real estate, even in the times of globalisation. Successful asset management requires "keeping your eyes and ears open to the market". This intermediary role between investor and user in a building in operation is called "core asset management". This is often known as "real estate management". Some areas, such as facility management or property management (the latter covers managing an individual building and its tenants), can be subcontracted to third parties. This, however, does not free asset managers from their general responsibility to both investor and user. 1.3 Extended real estate asset management Core asset management refers to the operation phase in the life cycle of a building. However, real estate asset management refers to the strategic management of the entrusted real estate assets "in their total life cycle and value chain" (see definition page 13). In other words: the asset managers and their experience and skills are not just important with standing investments, but also for acquisitions as well as with the question of whether a property changes its 14
1. Real Estate Asset Management: What is it? usage type or whether it should be kept or sold. On the subject of acquiring an investment property: regardless of whether a completed building is being bought, or if the investor, as often seen in times of low supply, becomes involved in a development project, the asset manager must be involved. Because asst managers are closer to the respective market, market segment, and user, they can access the knowledge they need to evaluate the success of a product particularly from an investor"s point of view but also from the product marketing perspective. Here early entrance into a development opportunity offers the opportunity to improve a product. A completed product, on the other hand, raises the question of whether potential "bad developments" can be corrected, and if the investment is needed. Asset managers still need to keep their own interests in mind, because they will be the one who have to deal with the potential problems that an investment brings about. Their more detailed knowledge and experience also make them the best judges of when to dispose of a property or portfolio, based on overall occupancy rate, rental level, physical status of the building, and the status of the investment market. The many tasks of asset management can be summarised as follows: Strategy advising (based on detailed market know-how) Choice of the right product (marketable and sustainable state-of-the-art building) Due diligence Finding the right deal structure Risk diversification by optimising the selection of country, usage type and cycle time Holding and SPV (Special Purpose Vehicle) management Founding of SPV companies Financing Treasury (Hedging) Tax optimisation Influencing the development process with the internal know-how (technical and commercial) to create sustainability Core asset management (managing buildings in operation) Keeping the buildings fresh Cost optimisation Income optimisation (marketing) Clients relations Property management Facility management Centre management Accounting Property and portfolio disposal Information Legal reporting Internal reporting 15
I. Introduction This task list quickly makes it clear that real estate asset management is a holistic task and is, thus, an organisational challenge in many ways. It needs local/ regional units that are both familiar with the respective markets and close to the users. It also needs units that deal with particular real estate asset classes office properties need a different expertise than retail properties, hotels or logistics parks. Also required are units that act as a hinge between the local/ regional units and the investor and which balance out the expectations and interests of one or the other side. It is just as important, however, that an asset management organisation is a "learning organisation" as well as a network where each of the individual (sub)divisions work closely together. This assumes that knowledge collected in the various positions and divisions is prepared in such a way that it is always available for everybody in the asset management organisation. It makes little sense to reinvent the wheel each time when one can use existing expertise to avoid making the same mistakes twice. The individual sections of the asset management organisation need to be involved in all phases of the life cycle. That goes not only for the "legal" and "tax" divisions, which are obvious, but also for the "marketing" division as well as the local asset manager. Shall investment companies take on real estate asset management themselves (and to what extent?), or shall they hire an external asset management company because of the diverse markets where investors are active today? This is a question of the quality of the asset manager and one of mutual trust. 16