PROPERT Y MANAGEMENT
Maintaining
the present
value of a
property
By John Kelly
In the previous About Time issue, we wrote about the difference between
property and asset management. In this article, we will elaborate, specifically
discussing the asset management task of providing advice on maintaining
the present value of the property, and in particular, the revitalisation or
refurbishment of a property as this is critical to the longevity of the investment.
Our advice will start by firstly explaining what NPV (net present value)
stands for, and why it forms the basis of investing in property. By
definition, net present value is the present value of all future cash flows
produced by a rental property less the amount of initial cash investment
required to purchase the investment property.
This is where time value of money comes into play. The longer you are
able to pay off your initial investment in the property, the better your
NPV rate will be. We at Time Projects take this into consideration for
all our properties, by making sure our properties are well maintained
and fully functional thereby making sure that it is capable of performing
throughout its lifecycle.
The difficulties start arising when a property reaches a certain age,
whereby issues start arising more frequently, incurring more costs than
normal. This in turn is noticed by the tenants, especially when these
issues start affecting their business. Unhappy tenant(s) eventually lead to
an increase in the vacancy rate. As this is obviously unfavourable, how
do we maintain the present value of this property? We suggest that the
best way to do this, is to reinvest into the property.
Nowadays, with sustainability, corporate social responsibility and
recycling high on the agenda, especially in a world of diminishing natural
resources, the decision to revitalise or refurbish a development could
be a wise call to make. An owner experiencing this dilemma should
certainly investigate the two different options of whether to reinvest through
revitalisation or refurbishment…
Revitalisations are structural changes to the quality and functionality
of the property. These include changes to technical, functional, and/
or aesthetic aspects of the property to adapt them to new user
requirements. Although the current usage is maintained, the economic
and technical aspects of the building is at or nearing its ‘use-by-date’
and vacancy rates are already climbing or threaten to do so soon unless
major investment measures are taken.
Alarm bells will be ringing at this stage, as the property is ageing and
falling behind in relation to the surrounding competition whereby affecting
the vacancy rates. The main aim is to revitalise the building, by restoring
the profitability, market presance, and marketability of the property
by improving the internal and external appearance of the property to
reposition it in the market whereby maintaining or even raising its value.
Refurbishment is about maintaining the usability of a property
and to keep it in accordance with the current building standards and
market requirements. Essentially this includes any enhancement and/or
improvement of a property, so that it remains fully let and relevant in the
marketplace.
Aspects of refurbishment include practices such as inspections,
maintenance, repair, and modernisation, to improve and enhance a
still-functioning property. By this we mean, the property is not yet marked
with vacancies and unhappy clients. One may even call refurbishments
as small-scale ‘beautifying’ and seen as ‘cosmetic repairs’, which will
always be required on almost all properties throughout their usable life.
A lot of the refurbishments of older, but still fully let properties are
undertaken because their age or appearance no longer meet the
customers’ current expectations. These cases can still be classified as
refurbishments, as they still may be classified as a healthy property than
that where revitalisations are required, because of potentially lethal
vacancies that will diminish its cash flow.
Funnily enough there is a difference.
ISSUE 40 - DECEMBER 2019
13