The opportunity to increase the appeal, and therefore the value, of a facility by means of telecommunications is not yet used by building owners to its full extent. Due to high rental rates and the general shortage of space, owners ignore additional sources of income. However, a few years from now, the lack of sufficient telecom infrastructure in a building may cost the owner tenants, warn experts.
Today, the 8% profit that premium-class realty brings to investors and the 9-12% that Class B facilities bring is not such a big sum, unlike just 3-4 years ago. As ALM Development CEO Mikhail Lepekhov notes, the more civilized and fiscally conservative the Russian development and commercial real estate management market becomes, the greater is the role of a thorough understanding of expenses and earning opportunities. According to Gars-Telecom, profits from telecom services in the capital region are currently less than $20 per year per sqm. Experts claim that this figure can be increased to $30-50. Moreover, as the market becomes saturated, telecom infrastructure will become an increasingly important factor in attracting and keeping customers.
Depends on the class rating
Key factors that influence earnings from communications and data transmission services are building class, rental concept, location, area (total and useful), audience profile, facility origin and type. The lower the class rating of a building is, the later owners and managing companies begin to think about communications services. According to Mikhail Babaev, head of the corporate segment department at Arktel JSC, telecom plays the most important role in Class A and B buildings, where the largest businesses and their management structures are concentrated. Telecom is less important in shopping centers and logistics parks, although nowadays warehouses should be wired for telephone, high-speed Internet and a data channel to the office. Hardly any store in a large shopping center can do without a payment system using bank cards. Payment is made by accessing a bank terminal Internet.
In every commercial real estate sector, telecommunications have their own features. There is an international classification. Class A, B+ and B buildings are supposed to satisfy certain requirements; they are allowed to miss one mandatory and up to four optional criteria. Buildings that don’t meet those conditions are rated as Class C or lower. Likewise, there are mandatory telecom, integration and services requirements:
- The ability of the telecom system to provide 24-hour server cooling (servers should be equipped with a modern cooling system);
- At least two independent telecommunications services providers in the building;
- Modern security systems and building access control (video monitoring of all entrances, including parking, an electronic pass system, round-the-clock building security);
- Modern fire safety system;
- Modern high quality, high-speed elevators from leading international brands (maximum wait should not exceed 30 seconds);
- Two independent power supplies with automatic switching or a backup diesel generator;
- A banking terminal (ATM), public Internet access, etc.;
- A professional company responsible for building management;
Telecommunications infrastructure is better in premium-class hotels than in Class B business centers. It includes also local, long-distance and international phone service, Wifi wireless Internet access, audio- and video-conferencing, satellite TV, including video on demand and additional interactive systems, on-line billing and 24-hour technical support in the facility.
According to Mr. Babaev, in the foreseeable future, office space owners will be setting up a single convergent IP zone within a building or a building complex, providing high quality, secure business services and lowering maintenance costs. “It is no secret that one of the most important conditions for successful business development is effective management of information flows in the company, which is not possible without advanced infrastructure. And if the owner is working with telecom operators that specialize in real estate, he can set up a premium service in his facility, charge premium fees for telecom services, increase the cash flow, and therefore the company worth,” notes Dmitry Alexandrov, Gars Telecom commercial director. Naturally, the presence of a ready to use telecommunications infrastructure influences the value of commercial realty. But this is by no means the only factor. According to Vlad Volfson, Chief Sales Officer at Corbina Telecom, competence and efficiency of the telecom service is very important.
Construction and maintenance
The best way to create an efficient telecom infrastructure is to join the project at the planning stage, before it goes for expert evaluation. It is at this stage that low-voltage mains, control rooms, internal and external networks are laid out, and materials and hardware brand and type chosen, all of which will subsequently help with the correct planning of the telecommunications infrastructure. Once the project passes expert evaluation and a building permit is obtained, the project is in the production stage, which includes requested changes, corrections to floor plans, etc. Success of the completed project will depend on a correctly chosen building concept that takes account of its purpose, class, area and location.
Speaking about new developments in the telecommunications service, Mikhail Babaev said, “Lately there is a strong trend among big tenants to demand the right to choose their own telecom operator, and even back out of the lease agreement if the owner doesn’t provide them this opportunity.” The owner faces many challenges from sophisticated tenants: dedicated communication channels from two or even more independent operators, two independent cable hook-ups in the building, two control rooms with independent UPS, etc.
The presence of two or three operators in a modern business center offers the tenants a choice based on the services available in the center, their quality, technical specifications and, of course, prices. Therefore, it is best to create conditions in the building where tenants can choose the services of whatever provider they prefer.
Operators gain access to the building telecommunications infrastructure so that they can reach their customers, while the building owner gains a stable source of income and increases the appeal of the building to tenants. In cases like this, building owners have to house operators in one or more control rooms and have vertical distribution mains. It would be best if a single operator took responsibility for managing the telecommunications infrastructure, paperwork, setting tariffs and working conditions in the building, and interaction with other operators on behalf of the owner.
Some building owners would like to see the telecom solutions provider as a single integrator and at the same time a co-owner and investor in all low-voltage systems (phone, Internet, TV, automation systems, security, fire alarm, access control, broadcast networks, dispatch systems, video monitoring, etc.) during design, construction and opening of the facility. The operator—co-investor in its turn would like to gain an exclusive right to provide telecommunications services. This might seem like an optimal solution. The building owner avoids additional investments and receives extra income from the telecommunications business at his facility. The operator has a guaranteed income from services it provides to the tenants. But experts from Gar Telecom warn that such an approach might hurt all three parties: tenants cannot get the full service package (unlikely with a large telecom operator), the operator may not get back its investments, and the owner may lose important tenants.
Experts believe that setting up a pocket telecom operator by the owner would not be effective either. “There have been many cases where such a non-core business did not meet investors’ expectations and the company ended up being sold to a first-level operator. Each case of inefficient investment is unique. Sometimes a small network upgrade is enough, while in some facilities it was necessary to dismantle large quantities of outdated hardware,” says Mikhail Babaev. Dmitry Alexandrov emphasizes that a home-brewed solution with a no-name telecom operator may, when market saturation is expected, cost the owner tenants for whom telecom features of the building are important.
Return on investment in telecom
The fast-growing Russian commercial real estate market is attracting the attention of ever more telecom companies. Lately, many operators offer their services in this sector that only recently specialized in calling card VoIP services and have little expertise in the area of real estate. “As a result, there is a growing number of inefficiently implemented projects, inappropriate for the facility, inadequately priced and requiring expensive maintenance, which negatively impacts the appeal of the facility,” notes Mikhail Babaev.
Often, in an attempt to maximize profits, telecommunication equipment retailers make “alliances” with technicians from development and construction companies, warns Gars Telecom. As a result, investors and facility owners never receive complete information about the real costs of telecom services in the facility, and how much they can really earn. That is why it is important to conduct an audit and develop technical solutions utilizing hot modern technologies, calculate the economic benefits of the suggested telecom solution and compare it with other similar solutions.
Experts think that the market has been opening up recently. On the Internet, there even is a free service, Telecom Calculator, that performs a cost-effectiveness analysis of investments in telecommunications services for commercial real estate. Telecom Calculator is based on an algorithm developed by the Connectum consulting group in 2005 and takes into account key factors that affect the cost of deploying telecom infrastructure at commercial facilities, as well as returns on communication and data transfer services. The Telecom Calculator user can enter total and useful areas of the facility being analyzed, specify its type, location, origin and other real-estate parameters. Based on that data, the calculator estimates the cost of the telecom infrastructure, pay-off period and potential income of the facility owner from implementing telecom services. Telecom Calculator can calculate these figures for business centers, retail and office complexes, warehouses and hotels.
“Return on investment depends on the area of the facility, its class and the presence of third-party operators in the facility. On average, a 10,000- to 100,000-sqm office building with two operators has a pay-off period of 1 to 4 years, depending on how fast the building is populated. 25,000- to 50,000-sqm shopping centers with a single operator have a pay-off period of 1.5 to 2.5 years.” For large facilities, the pay-off period for telecom infrastructure is about 5 years, says Vlad Volfson. When the developer itself takes on telecom infrastructure of the building, and telecom business in general, this period is several times longer. Gars Telecom’s experience shows that, when a professional telecom company is involved, ROI is 8-16 months on average. Provided a competent approach, telecom infrastructure significantly increases the building value, experts say. The presence of advanced telecommunications affects the image and success of the facility, which increases rental rates and, therefore, the cash flow. And the value of a commercial facility is determined not so much by the cost of the building itself as its business value.