As competition to manage properties in CEE picks up some large developers and investors are bringing their property management in-house. While the increased control and income from doing so have an obvious appeal, there could be an inherent conflict of interest involved — as well a potential performance risk.
The largest recent example of this trend was Immofinanz’s purchase of a stake in property management partner EHL Immobilien. Immofinanz CEO Eduard Zehetner told Czech Position that the basis of the decision was the sense that asset management is a core business for a property company.
“Accordingly, we immediately established a decentralized asset management function for the East European countries, by transferring management responsibility to the Executive Board … We also used the services of EHL for this purpose because the company then had available local capacity, as a result of the crisis,” Zehetner said.
For Zehetner, having total control over asset management is crucial going forward, just as the development of the company’s decentralized asset management was key to its survival through the financial crisis with improved vacancy rates.
According to Zehetner, the investment was limited to 49 percent because EHL is also active in other areas – for example, its brokerage – in addition to personnel leasing for asset management. “That is why Immofinanz did not acquire a higher stake,” he said.
Other side of the coin
According to Jan Kotaška, senior property manager at Jones Lang LaSalle in Prague, there are obvious drawbacks to developers and investors establishing their own property management divisions. “In my experience, the structure where the owner, the fund, runs it own property management department is something of a conflict of interest.”
Jiří Trojan, property manager at Jones Lang LaSalle, pointed out that the same conflict can arise with the linking of property and facility management, and that the increasing tendency for property managers to take on the tasks of asset managers is not a good long-term strategy.
“Asset managers need free hands to change the property management company if their performance isn’t good enough, but if they’re in-house then I think his hands are partly tied,” Trojan said.
For property management divisions like that in JLL, the trend of companies bringing property management in-house will make an already competitive environment even more heated, by reducing the number of properties available on the market. Yet Kotaška thinks this practice is unlikely to be carried out on a widespread basis.
‘[The] structure where the owner, the fund, runs it own property management department is something of a conflict of interest.’
“We really believe that the open-ended funds, even the closed-end funds — the big international players – will go the independent way. Especially now, after the crisis, they really have to show clear financials, and having independent property management would show more openness and control of cash flow than if they are doing it in house,” Kotaška said.
The changes in the sector are more widespread than the management of the property itself. Where asset managers generally used to be far more involved in the running of the actual buildings, there is an increasing tendency for local property managers in CEE to perform these functions while asset managers, located in financial centers like London, now concentrate their attention on larger portfolios to save costs.
“In my experience there used to be much more communication between asset management and tenants but now, with the large portfolios they are managing, asset management leaves all communication to the property managers, even in regard to the lease agreement terms,” Trojan said.