Tuesday, 15 January 2008

Berlin Property - Cost of Property Management and the Best Way to Control it (Part 1)

International property investors as well as German property investors are permanently facing the issue of getting value for money from their property management.

Which is the right fee level that does not absorb high proportions of the rental income but enables the property manager to provide the right service level required? How should the fee be calculated? What is the going market rate? What is included and what is extra? This article will give an overview of the rates an investor has to be prepared for and some existing fee models.

Every property investment needs a property management that is right for the property, right for the investor and right for the budget available. The requirements regarding qualification and quality are not discussed in this article and will be addressed in an upcoming publication. I will provide some examples fee payment models and then provide a fee span for the going rate for each model and an evaluation from the investor's viewpoint.

Fixed rate model

In the fixed rate model the property management fee is based on the number of units no matter whether rented or not. There is no relation to performance of the property manager or even the performance of the property. In other words you still pay the full fee, even if half the tenants move out. A variation on the theme is a slightly reduced fee for vacant units. Quite often this model does not differentiate between residential property units and commercial property like retail or office. It is only used when the commercial property has a relatively small share of the total investment.

The going rate in Berlin is somewhere between 14.00 € and 20.00 € per unit per month plus VAT (!) which is currently at 19%. The reduction for vacant units would be somewhere between 2.00 € and 4.00 € if it is offered.

The service provided by the property managers with this type of fee model seems to correlate with a quite basic service level. It is a preferred model used by small one man band or so called kitchen table managements working in a semi-professional manner.

Percentage model

At the first glance this seems straight forward and fair but it depends very much on the parameter the percentage is applied to. Let me show you some variations on the fee model:

  • gross contract rent including heating and ancillary cost -- Soll-Bruttowarmmiete;
  • gross contract rent cold (excluding heating) -- Soll-Bruttokaltmiete;
  • gross actual rent including heating and ancillary cost -- Ist-Bruttowarmmeiete;
  • gross actual rent cold (excluding heating) -- Ist-Bruttokaltmiete;
  • net contract rent -- Soll-Nettomiete;
  • net actual rent -- Ist-Nettomiete.

There are many more iterations possible but these are the most common ones. Again there will be VAT at the current rate of 19% added to the fee.

So if you are discussing property management fees and someone boasts that he is only paying 3.5% management fee what does that tell you? Right! It tells you almost nothing, only that they are using a percentage model.

Only the last option mentioned above based on the net actual rent really ties the fee a property manager receives to the rental income he helps to raise as a performance measurement. It is also the only model providing an incentive to not only sign nice rental contracts but to make sure the money is coming in every month. There are constellations like a renovation period when this fee-model would not be fair and another approach could be required that should be limited to the time of the exception.

Taking the just said into account it is a complex task to provide a guideline on going rates. There are guideline tables available but most are influenced by property managers associations. Also the size of a property or the fact that there is a portfolio with a single owner and one type of reporting will influence the fee calculation.

For a single apartment building with 20 to 40 apartments you should be able to get a decent management with simple reporting and bookkeeping for a rate of 4.5 to 5.5 % of the net actual rent. It will be some negotiation but is achievable. If you need balance sheet bookkeeping because you have a legal entity like a GmbH as owner it will be more to the upper end of the fee span.

A mix of fixed rate model for the residential units of a property and percentage model for the commercial part are quite widely spread in Berlin since many of the inner city apartment blocks will have some retail units on the ground floor and some other commercial units on the first floor while especially side wings and rear buildings will be predominantly residential.

In part 2 of this article series I will investigate

  • Other factors that influence the fee and the cost of property management.
  • What is the difference between the fee and the cost?
  • Other service provided by the property manager at high prices to compensate for competitive management fees.
  • Kick backs from suppliers or insurances.

For a check up on the content of property management contracts and related costs please contact the author.

The author is a Berliner and active in the German property market for more than 25 years. Experienced as project manager, developer and head of the German Business for a UK based property consultancy he now owns and operates Berlin Portfolio Ltd His international background and local expertise is an ideal combination for an international investor. For German terminology used in this article please refer to the German English Property Glossary available on the website of Berlin Portfolio Ltd. For property search we recommend Properties in Berlin


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