What is Asset Enhancement Initiatives and why is it important for property managers? Those who are learning about where to invest their money in Singapore for beginners will have came across the notion of Asset Enhancement Initiatives (AEI) when they do their research on REITs and Property Managers.
When we say a Property Manager is planning to do AEI, what we mean is that the manager is intending to renovate his property. This can be to keep the property up to date with modern designs or it can be to reconfigure the property for other types of commercial use. Judging from the varying goals, you can tell that AEI can be as small as changing the toilets and chandeliers to being as major as doing a complete tear down and rebuilt.
However, some astute readers will ask the fundamental question of why a Property Manager will bother with AEI in the first place. After all, if your main aim is to maximise your gross rental income as a means to increase your cash flow and profitability, you should not be thinking about spending money renovating. Or should you?
The reason why property managers do AEI is because it helps to keep their properties new and their tenants happy. When the facilities are up to date, it is often easier to get positive rental reversions. There are times where investors may think that companies should not bother doing AEI as they have already achieved full occupancy rate. However, it is important for property managers to be on their toes as the typical tenancy period is 3-5 years, after which tenants can choose to leave if a better opportunity comes by.
Even though AEI can be a huge CAPEX cost, it can be a worthwhile investment in so far as the resulting increase in rentals help to increase the value of the property. To give a concrete example, suppose a property manager ploughs 10 million back into a 50 million property in the form of AEI. Because of this renovation works, the manager expects to get 2 million in additional rental per year for the next 20 years. If we add a further assumption that the cap rate for the property is at 5%. What this means is that if nothing goes wrong, the property value should go up by 40 milllion when the company decides to divest the asset to a prospective buy. In terms of return, the property manager would have invested 10 million in AEI to obtain a 40 million increase in value.
If you will like to think about it in another way, an additional 2 million in rental revenue per year means that the company should break even in 5 years time and any additional revenue from the AEI works which have now been paid off will be pure profit.
Given the above, we hope you have a better grasp of what AEI is and why it is important to property managers.