Emerald Group Publishing Limited
Copyright © 2000, MCB UP Limited
Past, present and future
Past, present and future
At a time when we have left the 1900s and entered the year 2000, it seems appropriate both to reflect on the past and to look to the future. There are many who say one should not look back, but those who refuse to, I suspect, are often reluctant to look back on their own mistakes, or even to admit to ever having made mistakes. Failure to analyse any activity denies us the chance of maximising learning from that activity, whilst it is a fact of life that the past has helped to mould the present, which in turn will influence the future. Those who deny the merits of considering the past deny themselves the opportunity of learning both from past mistakes and past successes. In doing so they commit themselves to a more difficult future learning process than is necessary. When considering property management, as in other areas of life, there is much to be gained from considering past experience.
Complete property management embraces absolutely every consideration relevant to investment in and the ownership of real and leasehold property. Consequently the development, improvement, and redevelopment of property, and investment and reinvestment decisions affecting property, are all property management activities, just as much as are the day-to-day activities of managing existing properties. In the early post-Second World War years, the average concept of property management probably was that it entailed the collection of rents, the payment of outgoings such as rates, water rates, insurance premiums, and the costs of repairs and maintenance; dealing with tenants on a day-to-day basis as the agent for landlords; and preparing accounts and reports for submission to landlords. The concept probably also included such activities as negotiating rents and lease terms; making appeals against rate assessments; and negotiating improved insurance terms, but many who were involved with property management would have considered offering advice to property owners on other matters to be completely outside their range of responsibility. Such matters as advising a property owner on development, refurbishment or redevelopment, planning controls and building regulations, investment or reinvestment, and taxation considerations would have been regarded as completely outside the scope of property management by many, if not most, property professionals.
The growth of firms capable of providing the entire range of advice and services to property owners which they are likely to need as a result of their ownership, has been a major development over the past 50 years, but it is suspected that there is still scope for further development in the positive role of property managers, as opposed to what could be described as the passive role they often seemed to play in the past. The role of the positive manager should be to provide the client with the advice or service the client needs rather than simply those which have been asked for, and where a client is not aware of such a need the positive manager should indicate the need to the client. Whilst some property managers may already be doing this, it is likely that there are many who still need to expand their range of activities to manage in a more positive way than at present.
Fifty years ago, the UK and many other countries were still suffering from the aftermath of the Second World War, and the stock of property was much the same as that which had existed prior to the war in terms of design and quantity, except for the fact that, in many towns and cities, the stock had been depleted by war damage. Additionally, property maintenance and upgrading in general had been very much neglected for the duration of the war because of the more critical demands of the war effort. There was therefore great need for rebuilding, maintenance and renovation, and for both an upgrading of existing stock and an expansion of stock to cater for new demands which had arisen since the commencement of hostilities in 1939.
At the same time, in the UK there was a great shortage of essential building materials, as a result of which the government of the day imposed restrictions on new building in the hope of ensuring that supplies of materials and expertise were first concentrated on the repair of war damage, and other neglected building maintenance. It was not until the 1950s were well under way that substantial new property development began in other than residential property, and the late 1950s and the 1960s saw the development of a great amount of office accommodation in particular, and the development of high-rise buildings.
High-rise residential development seemed the most obvious solution to housing shortages in the immediate post-war period, and also the quickest way of providing much-needed accommodation for the poorer sector of society. With the benefit of hindsight, we now know that, whilst providing shelter, high-rise residential development also created a great number of social problems, particularly when used for the low income sectors of the community. We have probably learned from past mistakes that, whilst affluent members of society can have very comfortable lifestyles in well equipped high-rise developments, high-rise residential accommodation seems to increase the problems and cost of those struggling to live on low levels of income.
The commercial property boom of the 1950s and 1960s saw the creation of a number of very competent developers who became very wealthy in the process. The fact that they were doing essential work in response to social and economic demand seemed to be ignored by many observers who were highly critical of the fortunes they made, and who seemed to completely ignore the risks they took and the good they did whilst accumulating their fortunes. The passage of the years does not seem to have improved the perception of property developers in the eyes of many in society, which is regrettable in view of their importance to economies. This, perhaps, indicates a need for future efforts - in terms of education and public relations activities - to redress this state of affairs.
An important development in the early post-war years in the UK - which has been repeated in many other countries - was the introduction of a comprehensive code to control land use and property development, this being implemented through both planning controls and building regulations. Whilst there are some who argue that there is no need for governmental control of property development, and that economic forces alone would ensure the development of property in a way which was acceptable to society in general, I suspect that most would not agree with such an argument, but would acknowledge the great benefits which have resulted from the introduction of comprehensive development control. That is not to suggest that all that has resulted has been ideal, or even good, and there is still a need for many planners to understand the legal and financial constaints under which property developers have to operate. Many planners also need to appreciate that developers often work in very uncertain economic conditions which can rapidly change and turn potential profit into drastic loss.
Whilst progress has probably been made in many countries in developing greater co-operation between control authorities and developers, there is probably still much scope for further improvement. Confrontational approaches to proposals or to problem solving can be very counter-productive and costly, and there is probably still room for greater liaison between many control groups and developers. Many would probably also consider it desirable for some planning departments to adopt a more positive and constructive role, rather than to continue what is often seen as the negative approach to development which has been evident in the past.
Possibly the over-emphasis of some developers on "bottom line" financial success has been a cause of confrontation rather than co-operation in the past. Whilst some developers have operated in a socially responsible and conscious way, there are undoubtedly many who could improve the image of developers and the environment within which they operate by being more socially conscious and responsible, with the sacrifice of some element of profit. At the same time, the recognition by control bodies that developers can only provide the properties demanded by society if they can make acceptable profits would also help to ensure that "both sides" of the development operation work more positively to the overall benefit of society.
Apart from development control legislation, there is in many countries a considerable amount of other legislation affecting property investment and ownership matters. Much of this controls relationships between landlords and tenants, and, as with planning legislation, there are those who argue that such legislation is not necessary and that economic forces should be left to regulate relationships between landlords and tenants. However, laws are regularly enacted to ensure that there is equity in relationships, and, where economic forces are not allowed to operate freely, inequities are likely to arise. In the case of landlord and tenant relationships, much of the legislation seeks to protect tenants in situations in which shortages of supply of various types of property enable landlords to demand unreasonably high rents, and also to impose on them other onerous lease terms. Those who argue for the abolition of such legislation - as some do with respect to the legislation which protects business tenants in England and Wales - appear to ignore the fact that the very existence of planning controls almost inevitably results in a restriction in the supply of property to meet high demand, thereby frequently placing those who own existing properties - or planning permissions to develop new properties - in an oligopolistic, or even a monopolistic, situation in the marketplace. In such situations great inequity might result from the absence of legislation to protect tenants.
The past 50 years have been notable for the incredible development of technologies - some of them new - and for the passage into the electronic age. It is difficult to comprehend that cheap, desk-top computers can now do what could only be done about 30 years ago by very expensive computers which occupied whole floors of office buildings; that pocket calculators (which only performed four basic functions) did not appear on the market until about 1970; that facsimile machines have only been in common use for about a dozen years, and that mobile telephones have only been in general use for about the same length of time and in widespread use for a very much shorter period. The rapid development of technologies such as these has transformed life over the past 50 years, whilst it is easy to forget that the development and widespread availability of motor transport over the same period have also transformed the lives of most people. Linked to these developments have been large increases in the standard of living for many, and a consequent increase in disposable incomes; this in turn has led to the rapid development of specific sectors of economies, such as the leisure and entertainment sectors.
The result of such developments has been that the type of property demanded has changed considerably in many sectors from that which was suitable 50 years ago. In retailing, the advent of supermarkets and then of covered shopping centres of ever larger size, has resulted in retail properties, which had been in use virtually unchanged for sometimes as long as 100 years, becoming obsolete and consequently redundant. This has created substantial challenges for the property sector to keep up with rapidly changing demand patterns, something which is not easy to do when property development inevitably entails the commitment of substantial sums of money for a long period of time, and when planning controls often frustrate rapid response to demand.
Whereas many properties which were built at the beginning of the twentieth century, particularly residential, retail and office properties, were still satisfactory for use substantially unchanged 50 years or more later, it is highly likely that many properties which have been built recently or which will be built in the near future will become obsolescent, or even obsolete, perhaps within 20 years or so. This will place new challenges on those responsible for the valuation of, investment in, and management of such properties, the concept of a long term of 50 to 100 years being replaced with a long term which may be 20 years, or even less. If nothing else, it creates a need for property managers to be very much aware of trends in property use and investment, and to be both perceptive and imaginative in the way they operate, qualities which have not always been evident in the past.
Since the 1960s there has been a substantial change in the pattern of property ownership in that, whereas most property owners were at one time individuals, property companies, or local authorities, much property (particularly larger and valuable commercial, industrial, and retail property) is now substantially owned, either directly or through shareholdings, by major financial institutions such as insurance companies and superannuation funds. Indeed, many modern developments cost so much money that only large financial institutions can afford to own them, and this has a number of implications. The management of such properties ultimately rests with organizations which are primarily interested in obtaining acceptable financial returns from them. Frequently the major concern - for market performance objectives - is to achieve satisfactory short-term financial returns. This may well create a conflict with the conventional concept of property as a long-term investment, which dictates that returns should sensibly be judged over the long term rather than the short term. Emphasis on the short-term return rather than the long-term return is likely to result in many management decisions being made which conflict with sensible long-term property management and investment objectives, and a challenge for the future is likely to be for property managers to ensure that short-term objectives do not in fact frustrate sound property management.
There is another trend which may well result in short-term policies being implemented in property management to the detriment of sound long-term management, and that is the modern emphasis on the reward of executives through performance related bonuses. Where key property managers can substantially increase their personal incomes through improving short-term, there will, not unnaturally, be the likelihood that short-term profitability will be more important to them than long-term profitability, for in the long term they may be working elsewhere, retired, or dead! The fact that the key executives in the ownership groups - such as insurance companies and superannuation funds - are also often remunerated on a similar basis, is likely to further dilute attention to long-term considerations if by so doing short-term profits, and thereby personal incomes, can be boosted. This is a problem which is not restricted to the property field, and many commercial and industrial companies face the same danger that over-emphasis on short-term success may result in self-destruction in the slightly longer term. It will be interesting to see if, in the twenty-first century, the conflict of interest between the short-term personal objectives of executives and the long-term objectives of companies can be satisfactorily resolved.
I suspect that this problem is not helped by the activities in recent years in the property sector of financial advisers and statisticians, who often do not appreciate the specific features of property as an investment when compared with bonds and equities, and who consequently seem to analyse property investments as if they are merely large sums of money and as if the future will replicate the past. Those who are experienced in property investment, valuation, and management are familiar with the peculiar investment qualities of property, but those from other disciplines who do not have wide property experience often appear not to be aware of them or not to understand them.
Whilst some appear to see property merely as piles of bricks and mortar, and others see it as bundles of money, it will be a challenge in the future to ensure that property is properly regarded as an important economic good; it is an essential element in the production process and in commercial, industrial, retail, and social activity in general. Its value is very much determined by economic demand, and ultimately the values of individual properties are determined by the judgements of people who wish to put them to fruitful use. People create the demand for property, and those who are in contact with people and who understand their needs - particularly their changing needs - are likely to make the most effective property managers. Without demand from people who wish to use property, it may well be valueless, or even a liability, irrespective of how much money was used to create it or to buy it.
There is the great danger that those whose primary concern is to ensure that an acceptable short-term profit is generated by property will be tempted to ignore economic realities by seeking for ever increasing returns even when they cannot be justified by economic conditions. They may also fail to spend sufficient funds on maintenance and updating to maintain the value of the asset. Old style property owners and managers regularly regarded themselves as stewards, charged with protecting and improving valuable assets for the benefit of society in general and for future generations. There will be the need to ensure that such attitudes do not die as a result of financiers' desires for ever increasing short-term returns, or statisticians' beliefs that increased returns are a natural result of the passage of time, and that apparent statistical justification ensures their existence.
A consequence of what appears to be an ever shortening long term is that property owners and managers not only need to be aware of changes in demand patterns, but also need to be able to respond to those changes, which appear to occur ever more rapidly, as quickly as possible. Whilst such reaction may be relatively easy with many consumer products, with a durable, capital product, such as property, response is often extremely difficult and costly. Ideally, factories, offices, shops and other properties should be flexible and adaptable to respond to changes in consumer demand. To date such a requirement has conflicted with that to build to satisfy specialised user needs and to maintain building quality; with the exception of shops, factories, and office units which can be combined by removing partition walls, there has been little progress in creating readily adaptable properties. However, the rapid development of new technologies may be both the catalyst for and the means of providing more easily adaptable property in the future. Those who can successfully pioneer and develop properties which can be readily adapted to cater for changing consumer needs at reasonable cost and without sacrificing quality may well make large financial killings.
Fifty years ago, one of the biggest shortcomings in property markets and property management was the lack of reliable information, but the advent of the electronic age and modern information technology has resulted in an ever increasing amount of useful information becoming readily available. It is likely that this situation will continue to improve, and it will be essential for all professional advisers to avail themselves of modern and new technology when it can help them to operate more speedily and more effectively. Professionals will need to be selective in their use of information and then to analyse and use it properly. Effective use is critical as, ultimately, when all professionals have access to the same technology and substantially the same sources of information, it will be those who use them effectively, and who also provide the best service to clients, who will be most successful.
Much work which used to be difficult, time absorbing, and tedious can now be done very rapidly, efficiently and effectively through the use of modern technology. There is the danger, however, that the manager may be isolated from both the owner and the property user - particularly when large organizations are involved - through over-dependence on technology. The manager who communicates primarily through electronic mail is likely to know only what is communicated through that medium, and to cease to know his or her customers and to understand their needs. There is much to be learned through personal contact and observation which can be invaluable in the management process, but, sadly, there is evidence to suggest that many so-called managers fail to understand that a major task in management is to relate to people. The most successful property managers are likely to remain those who realize the importance of building human relationships as an essential part of their management activites. The most successful property investments are likely to continue to be those in which good landlord and tenant relationships are cultivated, that is those in which the landlord and tenant partnership is acknowledged and fostered.
Alan F. Millington