Alexei Maltsev: “One must to dive into business for management to be effective”

If the financial crisis did not start now it would have broken out in the Russian commercial real estate sector in the near future anyway. The main reason is the low effectiveness of domestic development, which has until recent been offset by the high yield. This is an important point raised by Alexei Maltsev, executive director, PRED-Group, one of the first professional management companies in the Urals market. In his interview to Commercial Real Estate Ural he revealed a business model a la Ural which works in the new economic reality.

– Starting in April an increasing number of the Urals real estate market participants use the past tense when they talk about the crisis. Is the worst already behind us?

– I am one of the skeptics who think that we have not yet begun to reap the consequences. For now we’ve seen only the tip of the iceberg – the drop of oil prices and the ruble exchange rates. The worst is yet to come. At least I do not see any fundamental reasons for the market recovery and so we need to learn how to run business in the new economic conditions. Many local market players have not recovered from the shock or downplay its possible aftermaths. I often talk to Ural businessmen on the “what’s next?” subject and hear a rather common answer: “We sit and wait when oil prices rise again.” This is a wrong attitude; we’ll never return to the past and the business environment will be absolutely different.

– Has MC PRED-Group already prepared for new rules of the game in the market?

– Today we try to improve our in-house business processes, plan to continue our professional growth and work on some new projects. The main challenge is to make our business as streamlined as possible. If we want to survive internal corporate management must be more effective. During the next month or two we plan to switch to international standards, which will certainly improve our operational quality and results. The gist of PRED-Group business is not in cleaning the office floors in a proper way but in raising the return on investments for the owner. The latter should realize that when he hires an outsourced management company he buys the expertise and experience he lacks. Thus we succeeded in raising the yield of the office center Samolet by 30%. We were able to retain the pool of tenants at the facilities we manage and even attract new ones. We met them half-way, slashed rental rates by 15-35% and allowed for payments deferral, accepting letters of guarantee. Apart from financial incentives, we also use other methods.

– I am afraid the overwhelming majority of owners in the Urals region are confident that they have requisite expertise for managing their properties and therefore they feel no need in the services of independent MCs. Or did the crisis radically alter the mentality of the Ural owners?

– The specificity of the Urals market is in the inadequate self-appraisal of many market players and in the lack of a professional approach to property management. Their stance is: “We are smart enough to do everything on our own.” Surely the financial situation affected the local market. The Urals owners ran into problems not seen before, the toughest being the rotation of tenants. Other businessmen try to overcome the new problems using the trial and error method. On the other hand, a number of players have come to realize that the cost effectiveness of their properties will be higher if they trust them to outsourced professionals. While just a year ago all property owners were holding the “we won’t born yesterday” attitude, now they take higher interest in our services.

– With such a ubiquitous negative attitude toward outsourced management in the Urals, how has PRED-Group contrived to develop its business so successfully in this region? Three large properties are managed by your company in Yekaterinburg. Did good connections play the decisive role?

– We are one of the few truly independent management companies in the Urals as we are not affiliated with any companies held by real estate owners. We were awarded management contracts through the victory in tenders and contests where local, national and international companies participated. The amount involved for the owner is so high that not a single property will be handed over to a management company without a tender.

– And how does your management company form prices for its services?

– Prices are always individual and depend on the property parameters: its specialization, whereabouts, class etc. and on the set of services: “all inclusive”, brokerage alone, or only technical maintenance. An outsourced management company usually gets certain fixed payment plus motivational bonuses.

– You earlier mentioned non-resident companies. Moscow-based MCs are known to be interest in the Urals property management market and will hardly miss out on their chance to enter the region on the crest of the growing demand for management outsourcing. Could you give an unbiased assessment of competitive advantages of local and non-resident managers?

– I’ll try to be impartial. In fact the whole work with international and Moscow-based MCs after a contract is signed comes down to opening a regional office and the employment of local personnel; in the best case scenario an executive punished for some misconduct is sent from Moscow. This simply brings to naught all their potential advantages – richer experience and higher skill of their experts. Yekaterinburg abounds in such examples. And it is very difficult to provide remote property management which is also a common practice in the local market. One cannot do business in absentia; to solve problems their real reasons are to be understood. It is necessary to dive into business on site for management to be effective.

The main advantages of local management companies are local experts who live and work here. The property owners who would like to hire outsourced managers first and foremost study the opportunities of resident specialists. They are still scanty on the market and have little experience but an important argument in favor of local MCs is their experience in the local market and their knowledge of the regional specificity in running business.

– Let’s talk about your personal experience. MC PRED-Group manages two absolutely different office facilities: the class B+ business center Samolet and class C administration building, a former industrial facility. Which of the two suffered more from the crisis?

– Of all real estate segments office real estate suffered most. The dynamics is very bad: the amount of vacant space is on the rise and rental rates are going down. We’ve roughly dropped the rent by 30% at our facilities. It is not excluded that the rates in all three classes will be almost identical. I believe office space will be offered at the rate of 1,000-1,100 rubles per sqm in class A, 800-900 rubles in class B and 500-800 rubles in class C. Therefore we’ll get back to the prices of 2003-2004. As regards our facilities, the tenant mix did not change in Samolet; here the offices of more stable and solid businesses are quartered. In the former industrial facility we have mixed audience representing small and medium-size businesses, a sort of anthill and here the tenant rotation was initially implied. In order to attract and hold clients, we improved the state of the building and lowered the rates to 650-800 rubles/sqm. A notable fact is that just a year ago public officials and experts reported on the dearth of quality office space. Hence the conclusion: in the current economic situation it would be precipitate to make forecasts for more than 3 months ahead.

– In spite of numerous problems you plan to launch a new property into operation in Yekaterinburg, namely the shopping and office center Europe. Don’t you fear a failure?

– The business and shopping center Europe sits in the very heart of Yekaterinburg, in the Year 1905 Square and it is destined to be a success regardless of the crisis. By now the retail part is roughly 70% filled with tenants and office space is being vigorously filled too. This will a premium-class property and we are very careful about the selection of quality tenants. We constantly answer the calls of national and local companies interested in the lease. The few quality properties in central Yekaterinburg with a quality concept are always in demand.

– When we just began our interview you numbered yourself among skeptics but, in my opinion, there is a fair share of optimism in your words. What happens next?

– Surely construction activities won’t halt. At the same time commercial real estate will stop bringing super-profits and the market will be more competitive. As a result, the positions of professionals will be strengthened while casual players will most likely abandon the market.