The second rent – where are potential operating cost reductions to be found?

Operating costs are assigned to the general management costs category. They are generated through consumption or utilisation in the property, which is why they are passed on to the tenant in full. Everybody is familiar with typical examples of operating costs, such as water supply, garden maintenance or waste disposal, from their own utility statement. As tenants frequently find the costs that are passed on too high, the utility statement often becomes an object of dispute between tenants and landlords.

Why influence the operating costs?

The amount of the management costs and, in particular, operating costs affects the gross rent and thus the potential amount of the contractual rent as well as the value of the property. Here are two examples: If the operating costs reduce while the gross rent remains the same, the net income increases (NOI). This is the surplus of income over expenses. As well as operating costs, other management costs such as maintenance and administration are deducted from the gross rent (Figure 1). The net income is used to value real estate. In the income approach to valuation, capitalisation of net income determines the value of the property. On the other hand, if the operating costs and the gross rent are reduced at the same time, the financial burden on tenants is reduced, tenant turnover decreases and there are thus fewer vacancies. As no operating costs can be allocated for vacant properties, the allocated amount increases in this scenario and so, in turn, does the net income. Other positive effects may include enhancement of the company’s image or a reduction in the number of objections to the operating cost statements.

Minimising operating costs thus either results in increased income for the landlord or lower costs for the tenant. Both are good reasons why influencing operating costs should certainly be considered one of the most important cost optimisation methods.

Tools for professional operating cost controlling

A well-founded assessment of operating costs requires thorough analysis and preparation of large volumes of data from a company’s various IT systems. Without the targeted support of suitable software solutions, operating cost controlling is simply inconceivable for lager housing portfolios. PROMOS provides housing companies with useful tools to create the required transparency regarding costs and cost generators, as well as to identify possible weak spots.

One possible solution is the PROMOS.GT cost comparison for utility cost statements with transaction /PROREX/NKPV (Figure 2). This report allows a cost comparison for a settlement period with a maximum of three comparison periods. The data basis is derived from the costs posted to the settlement unit (including direct costs that are allocated not to a settlement unit but to the rental object or contract) and the settlement data. Consequently, this analysis is based on ERP data, which results in improved quality of the master data as well as early resolution of errors in the invoice.

For a detailed analysis based on aggregated data records from the fields of financial accounting and real estate, we recommend using an SAP^® Business Information Warehouse (BW), which has tools that make a targeted evaluation more dynamic and flexible. In this way, the required source data can be read out of the ERP system using specially developed extractors. Using a query, these are prepared and then made available for access in a user-friendly frontend. Now the user can sort, filter or add diagrams to real data (e.g. for a residential building) in the familiar Excel environment. The navigation area of Analysis for Office, an Excel add-in from SAP^® BusinessObjects that is very similar to an Excel pivot table, provides extensive options for navigating the data in real time. The company code and settlement unit, various attributes and the relevant key performance indicators for operating costs are available for selection. These can be arranged, moved, consolidated, filtered and sorted in rows and columns. You can create your own overviews independently (Figure 3).

BW is a cut above the rest

Things start to get interesting if, in addition to the analysis, comparison data in the form of benchmarking is used. In this way, it is possible to determine the cost types causing individual properties or even major parts of the housing portfolio to generate excessive operating costs. For this purpose, the utility costs of individual accounting entities are broken down into cost types For example, accounting entities can be compared with one another (internal benchmarking) and outliers identified. The data pool in BW can be enhanced with external reference values such as those from the “Geislinger Convention” or the Deutscher Mieterbund (German tenants’ association). Comparing the utility costs of the company’s own real estate portfolio with the external reference values is known as external benchmarking. This allows regional or country-wide comparison of a company’s own operating costs (Figure 4).

For such extensive analyses, the solution with BW has clear advantages compared with conventional ERP evaluation. Moreover, an SAP BW can be ideally integrated into the company’s SAP^® ERP IT landscape. The flexible analysis options with PROMOS operating cost controlling provide a high level of cost transparency. This ensures meaningful action to the benefit of the tenant and the owner – be it maximising savings potentials through targeted measures and contributing to environmental relief or simply improving knowledge of the property.

Within the scope of operating cost settlements, a secure plausibility check of the statements can be performed using the PROMOS solution before they are even allocated to the tenants. This improves the ability to respond to tenant complaints and saves time-consuming administrative processes.

Good analysis is half the battle

From a financial perspective, operating costs are frequently the only option for influencing the overall rent or net income. Housing companies should always bear in mind that tenants and potential tenants can switch to a cheaper alternative at any time and that they are in constant competition with other providers on the market. That is why we advise always maintaining an overview of the market conditions and the company’s own property costs.

Dedicated analysis is unavoidable if potential for reducing operating costs is to be discovered. Effective operating cost controlling using PROMOS tools provides the management with key figures as a basis for controlling decisions. Based on any anomalies identified in the deviation analysis, specific priorities can be determined for concrete planning and optimisation measures.