Please could you explain the difference between “property portfolio management” and “property asset management”?
Essentially the distinction would appear to be one of client rather than a fundamental difference in activity. Thus one tends to associate the phrase “property portfolio management” with property investment, and “property asset management” with all other holders of interests in property. Naturally the two activities will overlap in some organisations and therefore one is more concerned with appreciating what the activities involve rather than who is doing what. For example, it might be very difficult to distinguish the two in an organisation such as the British Rail Property Board.
Interestingly, Norman Bowie touched on one of the elements in his letter to Estates Gazette on June 20(p 1471). Here he noted that, following takeovers, “the purchasers have all too often been able to sell off many of the properties at considerable profit to themselves”. Not only does this occur with property investment companies, it also occurs in the cut-and-thrust of company takeovers where assets correctly valued to the business in accordance with RICS guidance notes are capable of being sold in the open market for alternative uses to special purchasers at substantially higher figures. This question is a fundamental element of PAM, but there are many more ordinary elements.
Everyone who holds an interest in a property should be concerned with the performance of that property. Thus a tenant of a house should be as concerned about that property as the landlord. Tenants of residential property, for example, may object to installing roof insulation on the grounds that “they are not going to improve the landlord’s property for him”. In practice the energy saving to the tenant may more than compensate for the (grant aided) cost of the installation. Alternatively the tenant might volunteer to pay more rent if the landlord pays for the cost of additional insulation because the saving in energy bills might exceed the extra rent. The point is that the cost and benefits of asset management in this sense must be considered by both sides: they must not be ignored on the grounds that “it’s the other fellow’s responsibility”.
Many homeowners practise property asset management when they consider alterations and improvements. But, oddly enough, many organisations leave property management to an administrator with no real interest in property matters who acts solely as a payer and collector of money. In such organisations there is no proper property asset management and therefore no management effort to improve the performance of that company by achieving a better return from that organisation’s — or company’s — property assets.
Property asset management is an all-embracing phrase covering any activity relating to land and buildings that increases net returns. Thus the use of energy consultants can lead to substantial savings in operational expenses giving rise to improved business profits. In the case of investment properties the same exercise can lead to improvement in working conditions for tenants and their employees. This in turn improves the landlord/tenant relationship; reduces the hassle over service charges; and reduces the cost of services thereby improving the possibility of increasing rents at review by a larger amount at less negotiating costs.
Unit cost comparisons of comparable units can reveal “expensive” premises. This alerts the PAM to the need for investigations which might produce a simple fault that can be cheapy rectified. Thus the replacement of standard doors with circulating doors or alternate heat barriers might reduce heat loss. The cost in some cases can be minimal in terms of the annual savings and the exercise very profitable when measured as a rate of return on cost. In other cases comparison of performance on a unit cost basis could indicate that certain premises should be sold on the grounds of uneconomic units for that business to operate.
Full property review
Property asset management begins with a full review of all property held by the specified organisation. On occasions companies have a poor idea of precisely what interests they hold in which parcels of land. Production of a list is not always easy from a card index and not often sufficiently flexible for management purposes. Systems such as that developed by Mentor Management of St Albans can help with this task. The need for such a review is that many property holdings of large organisations have just grown over time in accordance with the day-to-day needs of that organisation or company. These needs may have changed — newspapers no longer need to be printed in Fleet Street because technology has improved communications and transportation — making it expensive to perpetuate historic locational decisions.
A review, if it includes a revaluation, can indicate: surplus space, surplus land, surplus buildings, under-utilised buildings, ie some are too big for the operation now carried out within them, land and buildings whose alternate use value grossly exceeds their existing use value, and land and buildings with substantial potential for development, redevelopment or refurbishment with or without a change of use. In addition, such a review could reveal substantial leasehold values: if held until the leases run out such leases will eventually reduce to a zero value. Now may therefore be the time to surrender such leases to the superior landlord for value in exchange for a new lease at market rental. In these various ways property which had previously been regarded solely as a resource can contribute to company performance.
Sadly that unpleasant activity of asset stripping can follow from the failure of a board to keep in touch with underlying changes in their sleeping property holdings.
On the other hand, classic results have been achieved by bodies such as the British Rail Property Board through active property asset management. Similar activity is beginning to occur in the case of regional health authorities where surplus land sales can be used to fund improvements in the health and hospital services which would not otherwise occur. Indeed one wonders how many hospitals could now be relocated in more accessible positions on the edge of urban areas releasing valuable central sites for redevelopment. Farmers are becoming active land managers in a response to falling farm revenues. The next major thrust is probably going to be in the local authorities, where a more positive co-ordinated approach is expected.
Change in attitude does not imply overnight changes in property performance, but planned changes over time to re-establish the highest and best use for each parcel of land or interest held should produce acceptable returns for most land holders. Thus it may make financial sense to relocate a hospital or a school to realise latent value to provide capital for a new and better facility elsewhere.
Careful analysis of the retail units occupied by a multiple retailer may reveal unused upper floors which could be income producing with or without planning permission for change of use. The changes in housing legislation even make it feasible to think in terms of residential lettings. Fifty outlets netting £1,500 per annum each from first-floor flats increases the profit line of the retailer by £75,000: divide the space into two and the figure is £150,000; ignore such opportunities and the income is lost for ever.
Conversion to offices or related uses could produce even higher returns and need not be at the expense of the prime use of the unit. Historic leases can suggest good management by the retail manager when in fact the higher profit level of a specific unit is attributable to an accounting figure for rent which is 20 years old; in other cases the picture may appear even better because the unit is held freehold. Asset management, on the other hand, would look at profit related to current rental levels and here evidence could suggest that a better return from the property might be achieved if it were to be vacated and let or sold to another retailer. The capital could then be used for relocation in a less costly position with possibly no loss in trade.
Industrialists, on the other hand, sit on what is regarded by them as industrial land at historic or current industrial values when market changes stipulate that the site now has a higher value for redevelopment within the new use class provisions — or, indeed, in parts of London a higher and readily realisable value as residential land. Superstores on redundant industrial land make sound financial sense where the demand exists. But such opportunities are not going to be recognised without someone taking a positive interest in a company’s property assets from the viewpoint of the property rather than the historic perspective of the business.
The point here is whether the management is taking an active property role or an inactive role. Currently many non-property bodies are recognising the additional return to their business that can be achieved through a more active use of their property resources. In some extreme cases it may be that some companies have a greater potential as a property company than as a trading or manufacturing company.
However, while one might criticise some businesses for ignoring their property assets and for being content merely to note that asset values exceed historic acquisition costs, it is less clear why so few surveyors are developing this service for their clients. Thus when any company or business requests a revaluation for company account purposes it should be possible for that firm to provide a full review of those assets in terms of their performance in pure property terms. It should be possible to do this in respect of freehold and leasehold properties and to at least highlight ways in which those existing premises might generate income to the business by, say: intensification of existing use; reducing operational costs; restructuring lease terms; maximising the use of the land in terms of the highest and best use and by emphasising any disparity between asset value (deprival value) and potential market sale price or by simply suggesting that the time is ripe to make an application for a reduction in rateable value.
Hence one might dare to suggest that many High Street banks are today occupying sites worth far more to the retail sector than to a banking sector; such prime High Street sites could possibly be sold after relocating the banks in alternate streets — perhaps next to the building societies — at lower annual cost but with no reduction in banking business.
A simple reflection on opening hours might suggest that such sites are not being used to their highest and best use. The provision of such a service to non-property companies would go some way to demonstrate that surveyors can offer a full professional service.
Property portfolio management is the current vogue for property investors and their advisers shifting many portfolios from a passive position to an active position. This again begins with a review of the whole portfolio, checking the balance between property sectors: the balance between value size; the balance in geographical terms, the balance in income terms and future income changes. Following the review the managers can then make recommendations to buy and sell in order to improve the performance of the portfolio in terms of the stated requirements of the investment fund. Such an analysis and review also requires a close scrutiny of the individual properties to see how individual performance can be improved by refurbishment, alteration and improvement, restructuring leases and, indeed, by change of use through planning.
Property portfolio management and property asset management involve the same sort of skills, but the former is concerned more with investment portfolios, the latter with the performance of property within a company or other organisation whose prime role is other than property.
