Maximizing asset value through effective property management services
JG Ingenieros S.A.
Smart engineering for sustainable, technological and healthy indoor environments
In this note, we will propose ideas and strategies for achieving sustainable growth and maximizing asset value with adequate Property Management strategies.
Topics include building improvement strategies, upgrading to green certificates to meet ESG goals, energy-efficient operations, and technology implementation to enhance performance.
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A right balance between front-end and back-end actions
Property Management can be seen as providing hardware and software services to the building users.
On the “hardware” side there would be all actions oriented to building improvements, energy efficiency measures, and technology implementation. All actions related with tenant relation strategies, environmental-social-governance policies, and new services to tenants can be considered “software” services.
“Hardware” property actions are the support for the “software” ones: back-end initiatives are needed to be successful in the front-end ones. For example, investing in a high-quality Wi-Fi network around the building is needed when you want to offer a way-finding system to building visitors.
Then there should be a balance between hardware investments and software investments, between back-end and front-end ones.
A properly maintained building
The benefits of a properly maintained building are:
Less running costs: a study by the BOMA (US building owners and managers association) concludes that successful commissioned and re-commissioned buildings (buildings that run under the intended design conditions) have energy savings of 20 to 40% and maintenance savings of 15 to 30% with respect to those that are running out of their optimum point. For office buildings, where energy costs plus maintenance costs can be about 35 €/m2-year, continuous commissioning can save up to 10 €/m2-year. This means an increase in net operating income of 2 to 4%, raising property values by 40 to 80 €/m2.
Less value at risk: in our experience, one of the critical points when going through a due diligence process in your building is to cover the requests for documentation on building permits and periodic official checks, capital expenditure plans, legal maintenance records. So, in this case, it is not so much the added value of these actions but the risk of a depreciation of your assets in the books or the complications that will appear in a building selling process. We have been very recently involved in a building transaction that nearly did not materialize because of the lack of evidence of proper maintenance. In this sense we think there is still a lot to do by the valuation companies when looking at periodic portfolio value for real estate companies.
In Spain we have quite a few of long-lease contracts in the public sector, such as public buildings that have been built and run by private companies for 20 to 40 years. From our experience, when the end of the contract arrives, one of the most difficult issues to agree upon is the value reduction of the building to be received because lack of capital investment or maintenance expenditure.
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A right priority of energy efficiency measures
Ordered from lowest cost/effort to highest we could state six levels of intervention:
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A life-cycle approach to capital improvements
?Best returns on investments are not quick wins. Buildings are long-term investments and so building improvement investments should also be considered in the long-term. It is not right to ask property or facility managers to get 2 or 3 year returns on improvements: we are asking 50% or 30% yearly savings on energy efficiency measures, when we are happy to obtain yearly rents at 5% of the building value.
We strongly believe that a Lice Cycle Cost approach should be taken in any property management decisions. Life cycle costs include all the different stages in a building: there is a good acronym for this: CROME: Construction, Renovation, Operation, Maintenance, End-of Life.
The service life of the different building layers must be considered:
a.??????Structure – 80 years
b.??????Envelope – 40 years
c.??????MEP equipment – 30 years
d.??????Internal partitions, fixed elements – 20 years
e.??????Internal finishes, furniture – 10 years
It doesn’t make sense to ask a facility manager to justify a boiler or chiller change with returns on investment of 2 to 3 years (mainly by energy savings and more equipment availability) when the equipment will be in use for, say, 30 years.
Some interesting initiatives from this long-term perspective come from the down south of the world: The Owners Corporation regulation from Australia requires the building owners to maintain a capital fund for a 10-year plan for the repair, renew and replace of all common areas of a building.
Two main drivers to consider when deciding what building upgrades to do.
When thinking about building upgrades, we can see the building industry going forward with two main drivers: sustainability and technology. Building improvements should then always consider these two dimensions.
Any building retrofitting should improve the sustainability level of the building: use of local and re-usable construction materials, improvement of energy and water efficiency, improvement of biodiversity, more sustainable transport systems. And clients and users are becoming more educated and want to know the level of sustainability or sustainability improvements in the building they occupy. We think that green building certification is essential to compete in the real estate industry. And is not only the final sustainability level but also the continuous improvement one: certifications for in-use buildings.
Secondly, we will have to incorporate technological solutions in the building, but never forgetting that the technology is a facilitator for the better use of the building, is not a solution in itself. All new buildings incorporate smart facilities, even when they are not specially marketed as “smart buildings”, and existing buildings will have to incorporate these services progressively also if they want to compete with the new ones. Smart buildings are buildings that incorporate technology to continuously improve the performance of the building with three strategies: extensive building monitoring, heavy interaction with building users and deep data analytics. Adding technology to existing buildings is quite easy, compared to other building upgrading investments, and a sound technological upgrade can be done for as low as 20 €/m2.
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Most relevant design criteria when carrying out building retrofits
We think that all refurbished or new commercial buildings will have to incorporate five characteristics:
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Quantifying the positive impact of building upgrades
Although benefits of building upgrades will be shared between owners and users, the necessary investment will be mostly carried out by the building owner. The potential economic return should be then obtained by the building owner.
Some industry institutions claim that buildings will get better rents when incorporating specific improvements. For example, some Leed reports claim up to 5% higher rents when comparing Leed-certified buildings with those who are not.
We are not so sure about this rental increase, but what our clients tell us is that a “premium” building (from the point of view of performance and services) will attract “premium” tenants when competing with surrounding buildings. It is quite about being better than your neighbour, in fact, and keeping your tenants happy so they don’t start looking tentatively to other options for a potential move.
What is next in the E of ESG
We have talked about building improvement strategies that increase the sustainability level of the building. We can see three future trends in the environmental improvement of existing buildings:
First, we think that energy efficiency retrofitting will remain clearly in the agenda of all building owners and managers, not only to achieve their ESG and decarbonization goals but also because of the actual energy prizes.
Second, we think three new players are coming into the retrofitting agenda: materials, water, and waste. Building users are more and more aware of the environmental impact of the building from this triple point of view and want to know what their building owner is doing to reduce it in these three areas, and there is quite a lot to be done on this.
Finally, more involvement of tenants is required if we want to really improve the sustainability of our premises. Sometimes the owner doesn′t want to make energy improvement investments because is the tenant who will benefit from them, or sometimes the owner is paying for all the energy costs and then the tenant is not interested in any energy saving action because it does not have any positive impact in his activity.
In this respect, one interesting initiative are the Green Leases: adding green lease provisions to contracts so both building owners and occupiers are aligned in this objective. The idea is that both energy savings from the owner and the user are shared between the two parts. US-BOMA Green Lease Guide is a very interesting source of information.
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