When it comes to commercial or retail property investment today, the outgoings costs can be a real drag on net income. Without some controls, landlords and property investors will struggle with lifting net income and market rents.
Before I go too much further with this topic I will say that most tenants today are very aware of occupancy costs and will compare properties on that basis before they choose to negotiate on a lease; they will also negotiate a rent that lessens their exposure to outgoings escalations.
It directly follows that every property manager and every landlord should devote care and attention to the outgoings process and controls for any investment property. A property with higher occupancy costs will usually be a property that is struggling to maintain full occupancy and tenants.
So here are some ways to help with monitoring and controlling your property outgoings:
- Budgeting – A budget for your property is a good thing and that budget should be updated each financial year; it should be monitored during the year and adjusted quarterly where necessary. You can also base all lease negotiations around the budget, by choosing gross or net rents, and escalating the rent through a well-planned rent review strategy over the lease term.
- Lease and rent structures – Choose the rent structures that suit the building, the landlord and the returns required for the property. In recently built modern properties, a gross rent may be suitable for the leases that you negotiate. Given that the property is either moving through a warrantee period (from recent construction), and the plant and machinery in the property is functioning well, a gross rent structure is likely to give the landlord a good return; in saying that the landlord or property manager will still need to manage outgoings well. In older buildings a net rent is a better choice for a new lease to give the landlord the returns and outgoings recoveries they require from each tenant.
- Energy, Water, and Gas – It is a fact that energy, water and gas costs will keep going up. Fortunately the ongoing technology changes in building lighting, lift machinery, air conditioning plant, cooling and heating will help us save some money from the expenditure budget. The cycles of plant and machinery can be optimised, together with the timing changes as a result of seasonal climate shifts.
- Preventative maintenance – The operational life of the plant and machinery in any investment property can be extended through implementing a preventative maintenance routine. Review all of your plant control systems, and other building systems (fire, security, lifts, energy) for efficiencies and preventative maintenance routines.
- Tender out your contracts – On an annual basis, put all of your larger maintenance contracts out to tender. You can do that as part of the preparation for the new financial year budget. As part of the tender process, review the services offered by each contractor, the economies, and the quality of services rendered.
- Facilities management – If property performance is a large problem and particularly with a building that you see as generally ‘challenging’, you can merge many of your maintenance issues into one ‘facilities management’ contract. In that way one company takes over the bulk of the building control systems and maintenance function; you can also seek their commitment to risk management and cost controls. There are savings to be made in such a strategy but choose your facilities manager well based on proven skills, and other factors of property performance.
So there are some things to be done here with operational costs in any commercial or retail property. A well-managed property is one where maintenance and expenditure budgets are well controlled.