Real estate in GCC and much of the world have been subjected to the dual shock of COVID-19 and oil price plunge, both occurring almost simultaneously of each other. These historic events have only amplified the distress on an already sliding real estate market due to what essentially appeared to be a supply-demand imbalance. Whilst the full aftershock of the two events is still unfolding, its impact at both macro and microeconomic levels is undeniable.
Real estate owners are already witnessing stress on their operating cash flow which is only expected to get exacerbated in the near future. There is an imminent fear that service charge collection may be impacted as occupants either vacate or default on their payments. This in turn will have a knock-on impact on the owners’ ability to run the day-to-day operation of buildings.
There is an urgent need therefore to reduce building operational costs as may be feasible in order to see through the current crisis situation and move from a survival to a revival mode.
The Myriad Dimensions of Cost
Cost as an element of life and business has various dimensions. Costs can be viewed as fixed and variable, absolute and relative, expense and investment, and so on. It is important to consider these dimensions while formulating any cost reduction plan.
Summing Up Building Operational Cost
In its most simplistic form, building operational cost is made up of the following two budget elements:
These are short-term expenses and are typically used up in the accounting period in which they were purchased. Such costs represent the day-to-day running of a building and include it
These are major purchases that will be used beyond the current accounting period in which they are purchased. It generally includes items such as:
2020 Cost Reality of a Large Mixed-Use Development in Dubai
The figure below provides an example of an actual OPEX budget of a large mixed-use development in Dubai. Utility cost (DEWA) is seen to dominate the budgets in the majority of buildings in Dubai; other costs such as sinking/reserve fund, MEP, community charges, and management fees also presents opportunities.
Whilst it is easy to identify the elements which inflict the highest cost burden making them the obvious targets for cost-cutting, it may not always be prudent to take such prima facie action prior to carrying out a cost behavior analysis to establish the sensitivity of cost elements on the business outcome.
Rethinking Conventional Cost Strategies
Any arbitrary cost reduction plan – based on rationales of a conventional thinking pattern – is no longer sufficient as it risks cutting muscle as well as fat. Instead, asset owners and operator need to take a more strategic approach by viewing cost-cutting as part of a broader efficiency effort. Balancing short-term tactical cost reductions with longer-term strategic cost initiatives will leave assets much better positioned to tackle the current crisis scenario. The way forward must include a blend of both traditional and newer approaches that are now available to asset owners and operators.
QUICK FIX LOW HANGING FRUITS
Pitfalls of Cost Reduction
The pitfall of a cost reduction exercise which has not been well planned and well thought of are many and hence asset owners and operators must exercise caution and prudence at all levels. Some of the most commonly encountered risks are:
Land Sterling can provide expert advice on building operational cost reduction techniques to asset owners and operators in order to sail through the current market situation in the GCC.
ABOUT THE AUTHOR
Surajit Biswas heads the Project & Building Consultancy division of Land Sterling and is a chartered surveyor. He is also a certified member of the International Facility Management Association (IFMA) and Institute of Workplace and Facilities Management (IWFM). With over 20 years of international experience within the built environment, he has considerable knowledge and expertise in designing and delivering of facilities management services in large commercial developments. To connect with Surajit Biswas, email him at email@example.com.