A.T. Kearney, one of the world's leading management consulting firms, sees an untapped revenue opportunity of $30bn in ancillary revenues for developers in the MENA region, of which around $5-10bn are in UAE and an additional $8-12bn are in Saudi Arabia.
Like a vast majority of economic sectors and geographies, real estate in the GCC has been impacted by the existing economic climate.
Typically the real estate developers have used geographic and asset-type diversification as a strategy to manage risks. However, in a global crisis situation, the benefits of diversification are limited. Developers globally and in the GCC are therefore carefully considering opportunities to refine their strategies and business models to make the most out of the current situation.
A.T. Kearney says there are clear opportunities for developers to maintain and in some cases increase, top and bottom lines by moving from a property sales business model to a business model where income is generated through the management and provision of services to properties.
"Essentially, as projects are completed within the GCC, there is an opportunity for developers to shift their focus from 'develop to sell' to a 'develop, manage and collect' business model and tap into ancillary revenue sources, explained Dr. Dirk Buchta, Partner and Managing Director, A.T. Kearney Middle East.
Ancillary revenue is geared to capture a greater 'share of wallet' or proportion of 'end user-spend' through real added value services. These supplementary revenue opportunities can be sourced from tenant and non-tenant based fees and commissions, revenue or profit sharing and even from savings sharing.
Beyond facility and property management fees, examples of ancillary revenue opportunities range in more mature markets from mortgage finance to IT as well as business support services. These could also include peripheral services to residential tenants such as healthcare, education, travel agency and even butler services.
Fees and commissions from non-tenant based sources include rental of common area property spaces such as lobbies and gardens for events, land for telecom operators and licensing deals such as facility naming rights, merchandising, advertising and concessions.
"The naming rights campaign held by the RTA for the Dubai metro is an excellent example of ancillary revenue that is used in other real estate asset classes around the world,"
said Dr. Buchta.
In addition to the fees and commissions, developers may generate ancillary revenues through different degrees of revenue, profit and savings sharing with public or private partners. An interesting example is the application of smart metering systems in utilities management where the developers and utility provider can share savings achieved. Systems of this type are being piloted around the world, with positive early signs.
Ancillary revenue sources can become significant revenue contributors for well managed assets. "An example of this is a leading sports entertainment complex where we were able to almost double its revenue by aggressively tapping into sources of income considered 'ancillary', over and above its traditional revenue streams." said Mauricio Zuazua, a senior real estate expert with A.T. Kearney. He added that opportunities of this nature in a variety of real estate classes in the region have yet to be tapped.
Naturally, ancillary revenue will depend on the type of property and development, but even in residential complexes, ancillary revenues can be pursued and captured by the community developer, boosting revenue and profitability from five to 50%.
"Beyond using this approach for revenue substitution, developers can incorporate this into their business model using best practices and lessons learned from around the globe and ultimately create value for their tenants and added profitability for themselves," added Zuazua.
The model is not new and in certain industries such as airlines, it has become intrinsic to their operation. For real estate such a model has the added benefits of promoting more stable revenues, which lead to better valuations, lower risk, better rating and overall a lower cost of borrowing for the developer. This encourages positive differentiation and improved positioning within the marketplace and reduces tenant churn.
"According to our research this model has clear advantages on a more macro scale for the UAE and other GCC countries. Business models that focus on ancillary revenue, lend themselves to the region's strategic plans to diversify the economy, by encouraging the growth of the service industry, while driving stability and maturation within the property sector,"
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