Slow progress in CRE outsourcing

News

07 March 2002

This is quite a turnaround from the almost dogmatic faith in the idea at the start of 2000 when it looked like the time was ripe for private sector transactions. Then, flexibility was the watchword and it seemed that all property ownership, services and management should be considered as “non core” and so could be outsourced.

Now there are doubts about whether those who paid for flexibility will use it and whether such built-in flexibility – to take account of changing business plans – can actually be a disadvantage.

Companies also now realise that the process of defining core and non-core has to be subjected to a myriad of financial and non-financial measures and is actually very complicated.

Some blame for the sector’s failure to take off is levelled at the lack of pure outsourcing players and their slow progress as a type of operator in countries other than the UK. Those in the market already – for example, LS Trillium and Mapeley – have registered their European ambitions, but not yet made an impact in continental Europe. They remain busy with large UK contracts.

Others say corporates must share the blame for displaying a get-rich-quick attitude and swapping the prospects of long-term partnerships with investors for ready cash. This has combined quite nicely with the ambitions of the short-term investor, such as private equity funds, crowding longer-term money out of the market.

The provision of long-term capital seems to be the key. Surely this would give corporates the confidence to see the benefit of less traditional property deals, in the knowledge that capital has been committed to the partnership?

Capital from institutions is already coming into the sector, one UK example being Innisfree’s fund, which offers investors an indirect exposure to the private finance initiative market.

But this is still only an indirect exposure and institutions are not known for jumping too fast into new ideas. And judging by the attitudes of property companies, which are not easily swayed into providing anything other than regular landlord services to tenants, this capital will be difficult to tempt into the sector.

The philosophy of outsourcing still makes sense, but the market’s slow evolution in the past two years will make it harder to convince the market.

So can corporate outsourcing survive? Our survey this month looks at corporate real estate disposals and argues that far from being a new sector offering partnerships between investor and occupiers, the transfer of property is actually just corporates undertaking property deals using traditional structures. This is quite a turnaround from the almost dogmatic faith in the idea at the start of 2000 when it looked like the time was ripe for private sector transactions. Then, flexibility was the watchword and it seemed that all property ownership, services and management should be considered as “non core” and so could be outsourced. Now there are doubts about whether those who paid for flexibility will use it and whether such built-in flexibility – to take account of changing business plans – can actually be a disadvantage. Companies also now realise that the process of defining core and non-core has to be subjected to a myriad of financial and non-financial measures and is actually very complicated. Some blame for the sector’s failure to take off is levelled at the lack of pure outsourcing players and their slow progress as a type of operator in countries other than the UK. Those in the market already – for example, LS Trillium and Mapeley – have registered their European ambitions, but not yet made an impact in continental Europe. They remain busy with large UK contracts. Others say corporates must share the blame for displaying a get-rich-quick attitude and swapping the prospects of long-term partnerships with investors for ready cash. This has combined quite nicely with the ambitions of the short-term investor, such as private equity funds, crowding longer-term money out of the market. The provision of long-term capital seems to be the key. Surely this would give corporates the confidence to see the benefit of less traditional property deals, in the knowledge that capital has been committed to the partnership? Capital from institutions is already coming into the sector, one UK example being Innisfree’s fund, which offers investors an indirect exposure to the private finance initiative market. But this is still only an indirect exposure and institutions are not known for jumping too fast into new ideas. And judging by the attitudes of property companies, which are not easily swayed into providing anything other than regular landlord services to tenants, this capital will be difficult to tempt into the sector. The philosophy of outsourcing still makes sense, but the market’s slow evolution in the past two years will make it harder to convince the market.