It’s that time of the year when property managers are at their busiest; budget season. Every year your property manager should prepare an income and expenses budget for the next financial year, and they should do it well before June 30 to give them time to do the following processes:
Income forecast.
From 1 July to 30 June, how much income is expected to be received. Aside from normal tenant rental, consider all types of income including car park rental, phone tower licences, storage rents, outgoings, recoverable expenses and utilities, turnover rental, kiosks and casual leasing income, marketing levies, signage rent, etc. Don’t forget to take into account incentives and abatements. And of course budget for any future vacancies and associated costs such as leasing commissions, legal fees, incentives and any required landlord works.
It’s important to be accurate and include fixed, CPI and market rent reviews expected during the period.
Expenses forecast.
A great property manager should always look at reducing outgoings, as this in turn increases the value of any asset.
However they should always be mindful of quality vs price. Contractors should be reliable, honest and provide a good service. Getting the cheapest price isn’t always the answer, especially if the service standard frustrates tenants and entice them to leave the building once their lease is at an end.
Depending on the type of property, the client’s needs, the relationship with the contractors and the quality of the service, not all services may go to tender every year. However it’s important to review agreements and check that pricing is still at market rates. For the services that do get reviewed or tendered out, the property managers should be unbiased and neutral in seeking out good quality and reputable contractors and negotiating the best prices on behalf of their landlords.
Reducing every $1 in outgoings per annum potentially increases the asset value by $14 (using a yield of 7%).
Example of services to be reviewed are: insurance policies, cleaning contracts, landscaping contracts, fire compliance services, security contracts, air-conditioning maintenance contracts, common area electricity prices, etc.
As part of the budgeting exercise, it’s important to estimate all statutory charges (rates, water and sewerage, land tax), marketing expenses along with the marketing strategy (mainly for retail centres), capital expenditures expected for the new financial year, and any other costs which are part of the client/property’s plans for those 12 months.
Get quotes, seek client approval, inform tenants.
Developing scopes of works for services, going out to tender, reviewing quotes, negotiating better prices and finally getting landlord approval is a lengthy process. It’s best to start early in February or March so that the landlord then has the time to review the quotes and the budget, give feedback and adjustments to be made before a final budget is locked in for the property.
When your tenants are on net leases, it’s critical to send them the final budget and their new outgoings estimate for the new financial year at least 1 month prior to June 30. The deadline for most landlords is 31st May (legislated by the Retail Shop Leases Act) to send out this notice to tenants. So a good property manager will ensure this deadline is met and they should keep you in the loop during this whole process.
Budget season is a busy time, but it’s a productive one. As an owner, push for savings in your outgoings and ensure your property manager is effectively managing your property’s budget. They will have to show you and explain any significant variances in this budget over the next 12 months, so this will test how accurate their predictions are!
Phil Levesque, Director, FAL Property Group
