Real Estate

<p>I often had, both within the companies, I have worked with and during consultancy work for third-party clients, been "subjected" to unflattering judgements on the profitability of property management organisations for shopping centres (but this could also apply to the office and logistics asset classes).</p><p>"Margins are low! "So much turnover... but for what?" are the most frequent statements followed by the corporate objective of increasing profit of the dedicated P&amp;L.</p><p>I have to say that the problem is objective, especially when a company 'inherits' (perhaps after an acquisition) very structured organisations with high fixed costs.</p><p>The scenario is different when one can build an organisational model from scratch (which is not very current in mature markets with little new shopping centres development).</p><p>In these (now rare) cases, it is possible to adapt the organisational model to the target market and achieve more than satisfactory profitability.</p><p>There are no magic formulas, and indeed, the various business models derive from different market contexts.</p><p>On the one hand, we have property management companies operating within a group that owns the real estate portfolio they manage or are guaranteed by long-term contracts and fees often higher than those of the "free market" (we indicate them as part of group A).</p><p>On the other hand, other companies operate "in the free market" characterised by intense competition, short-term contracts, and management fees that tend to decline year after year (we refer to them as group B).</p><p>Analysing the organisational charts and related P&amp;L of the companies operating in these two contexts (which are very different in many respects) gives relatively homogeneous results.</p><p>The companies belonging to group A have, on average, very structured organisational charts with centralised decision-making procedures that leave little room for decision-making by those working 'on-site'; in our case, shopping centres managers.</p><p>Group B companies have very lean headquarter structures and "decentralised" decision-making processes in which the role of managers located in shopping centres is crucial on several fronts. Their sphere of action is extensive and goes beyond mere management procedures, as they are often also responsible for strategic marketing, leasing and technical supervision. As a result, these companies have 'lean' headquarters structures and lower costs (also because the management fees are lower than in Group A companies).</p><p>Between group A and group B, there are other "intermediate" and less extreme situations. However, for the sake of simplicity, I have preferred to reduce the distinction of property management companies to the two groups described above.</p><p>The companies belonging to Group A tend to provide high-quality services thanks to experienced professionals in each segment (financial, legal, technical, marketing, leasing, management). The decision-making processes are more articulated. Sometimes, there are difficulties in communication between the various operational lines, which does not always favour a clear overview and the possibility to act promptly as the chain of command is very articulated.</p><p>Complex organisational structures require adequate fees. But unfortunately, this is seldom the case for property management companies belonging to group B, which are often victims of "downward fees" and "dumping" by competitors who, to win a tender, increasingly reduce profitability margins (hurting not only themselves but the entire market).</p><p>We are facing a "Kafkaesque situation": if one chooses quality, there is more difficulty in going to the "free market", and one must act in "protected areas". If, on the other hand, you want to operate in the "free market" and push for profitability, you have to find a compromise on quality somehow. Thus, also accepting the risk of less control over the managers located in the shopping centres, which over time acquire more and more "power" in the customers' eyes, becoming their primary interlocutors.</p><p>It is not good if headquarters costs "get out of hand" and become very demanding for companies operating on the free market. There are significant risks because even the loss of a few assets can lead to a collapse in profitability as fixed costs are "indifferent" to the fall in turnover.</p><p>I have also seen companies belonging to Group A unable to compete on the "free market" because the fees were too low and the duration of the contracts too limited in time, making the profit and loss account unsustainable. So, in practice, they were "backing out" because it wasn't worth it. I believe that quality always pays off, even at the expense of lower profitability. Therefore, it is not impossible to find a compromise between head office and peripheral costs.</p><p>Lowering fees beyond common sense is a path that never leads to optimistic medium-term scenarios. And it is undoubtedly paradoxical and unacceptable to manage dozens and dozens of shopping centres without adequate profitability.</p><p>The correct management of shopping centres requires significant investments (think of the transition phase towards increasingly advanced digital marketing tools). Therefore, this topic is something that the owners of shopping centres or asset management companies operating on their behalf would have to take into due consideration.</p><p>Their shopping centres (but I would extend this consideration to all types of asset class) need to be well managed, capable of attracting the best tenants and therefore guaranteeing a solid and constant rent collection over time.</p>