Corporate real estate professionals are an essential part of a company, but who are they and what do they do? Stephen G Spooner explains
A company’s property department serves the needs of its parent and may be required to deal with office, industrial, retail or residential property. Any of these could be referred to as corporate real estate (CRE). This article, however, focuses upon the effective provision and management of office space.
Large companies share a number of characteristics that will shape how the CRE team does its job. For instance, operational considerations will sometimes mean that the optimising of real-estate usage takes second place; changes to the corporate structure will not always helpfully coincide with the property cycle; and inter-departmental rivalries may require a detached view of procurement and the allocation of space.
What is required of CRE?
It could be said that the provision of office space is simply an extension of the human resources function, providing a comfortable, safe and efficient environment for employees to carry out the tasks for which they are employed. The function of the CRE team is to deliver that environment in accordance with the company’s operational requirements and at the lowest possible cost. I refer to this as the principle objective, although it is rarely achieved.
The CRE team may have to advise on whether the office accommodation should be provided by way of leasing, pre-leasing a new building or purpose building. This will entail evaluating the available space, reporting on the capabilities of, and the terms available from, developers, researching sites, investigating planning and making objective comparisons. This information needs to be presented in a form that is easily understood by board members, who are unlikely to be property professionals.
If the company is restructuring or responding to changing conditions in its market, it might be necessary to reduce the amount of office space or to move elements of the workforce. This is probably the most difficult part of the CRE job, since these operations are usually confidential and take place at a time when other organisations are doing the same thing.
There is a widespread belief that the CRE professional is a time traveller and therefore able to execute all tasks yesterday. He or she cannot read minds, but adopting the disciplines used in private practice should help to avoid misunderstandings. Always obtain clear instructions and set out the assumptions that you have made. Those giving the instructions might require help in providing this clarity. Be wary of making recommendations that would materially affect the way in which the business operates without obtaining support from the operational divisions.
Any ambitions of becoming a property investor or developer should be suppressed unless they are clearly required to meet the principle objective; success in either of these areas is likely to require actions that are inconsistent with that objective. It is no coincidence that few operational companies retain long-term property development or investment functions.
When faced with pressure to deliver new facilities, it is easy to focus entirely upon speed and superficial costs. Once the valuable human resources are ensconsed, the memory of day-one costs or capital contributions will fade rapidly, but other lease terms will have a longer life. That “great deal” can become eye-wateringly expensive if the facility needs to be closed. Can the terms agreed really be operated? Is the deal too complex to be of any use when you need it?
Business planning and procurement
The horizon for most business plans is much longer than the real world allows. The principle objective does not mention the business plan, which can (and probably will) change at a moment’s notice. Flexibility is necessary, but the price for this is determined mostly by the prevailing market conditions at the time of acquisition and by the CRE professional’s powers of negotiation. Keep an open mind; it is not, for instance, always necessary to front-load the cost of introducing break clauses by paying a higher rent. A penalty payment at the break point can be a useful device and has the benefit of being a predictable cost that can be added to financial appraisals.
The CRE professional should take an interest in the investment market because a quoted property company might have very different priorities from those of a pension fund or a private investor. A deal might be possible with some owners but not with others.
An owner-occupier should look for flexibility in the physical elements of operational assets. Office space in a good location that is suitable for a wide range of occupiers might seem to be an expensive luxury, but it can represent the best value if things get rough. If specialised space is required, a CRE team should be sure that its company’s depreciation and asset valuation policies adequately reflect the difficulties that will probably arise on disposal of the property.
The use of a benchmarking service such as IPD’s Occupiers Property Databank will provide an overview of the value that is being obtained for premises expenditure. The benefits of the discipline that such a service imposes cannot be overstated; procedures and systems that gather and give access to crucial information are the key to meeting the principle objective, or getting passably close to it. The business school cliché — “if you can’t measure it, you can’t manage it” — might seem prehistoric, but it has never been more relevant.
The CRE professional should ensure that he or she has instant access to up-to-date information on all liabilities, rights, historic occupational costs and likely future movements, and analyses the data in ways that are relevant to the business and its industry sector. The board may not ask for figures regularly, but when they do you can be sure that it will be urgent. That is not the time to be gathering data, determining its quality and devising an analysis methodology.
The big picture
CRE professionals must have a thorough understanding of the company in which they work, its role in the industry and its business strategy. A good grasp of the taxation and accounting issues relating to the occupation of property will help in instructing and managing advisers; it will be necessary to explain to directors the property implications of any decisions. If this can be achieved while meeting the principle objective, a seat at the board table may not be far behind.
Stephen G Spooner BSc FRICS is a consultant at Pythagoras International, a director of hSo and PISCES and a former director of British Land Corporation
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Further reading |
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Billing M and Evans K, Sarbanes-Oxley roadmap, Journal of Corporate Real Estate, vol 7, no 1, January 2005, pp23-33(11) CoRE 2010 The Changing nature of work and the workplace, Corenet Global Edwards V, Corporate property management: Aligning real estate with business, Oxford Blackwells Houston R, Cracking the landlord and capital markets code, Journal of Corporate Real Estate, vol 7, no 1, January 2005, pp49-54(6) International total occupancy cost code, IPD Occupiers Property Databank Organ J, Maximise your property assets: An occupiers guide to commercial property, Estates Gazette, August 2003 Property in business – A waste of space “The Bootle Report”, RICS Thompson, McAllister, Marston & Snow, Real estate and the new economy: The impact of information and communications technology, Oxford Blackwells |
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Why this matters |
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Much has been said about moving the provision of certain functions outside the business, and taking advantage of innovative working methods or technologies. Known as outsourcing, it can include the transfer of all property interests to the provider. In order to make a worthwhile contribution to this debate, a thorough understanding of the business, its processes and risk profile is vital. Outsourcing shifts the risks of providing support activities away from the procuring organisation, enabling a focus on core competencies. Cost reduction should be a secondary consideration, and any significant savings should be carefully examined since the risk may not have been transferred as originally intended. In offshoring, certain functions are moved to a location where they can be performed at a lower cost. This may or may not form part of an outsourcing contract, but it does have implications for real-estate usage if it leads to a requirement in one location and a surplus in another. The CRE professional may be required to provide data for reporting to shareholders and lenders. Accuracy alone is not sufficient; it will be necessary to provide an audit trail as proof. Knowledge of where the information has originated and how to account for changes can be achieved only by being organised. Worldwide corporate governance trends are increasing the pressure in this area. From January 2006, Directive 2002/91/EC will affect the management and record keeping of all property types, but especially offices. Energy performance certificates will be required for all buildings sold or leased. One of the practical effects of this is that energy usage will become as relevant to the CRE professional as to the facilities manager. The certificate and its contents will doubtless influence both the value and use of the asset. Contributing to the development and implementation of environmental and corporate responsibility is a crucial part of the CRE function. The buildings for which you are responsible may form a major part of the energy consumption of the organisation. The widely held view is that companies that fail to set targets for improvement in these areas will be less attractive to investors. |