Property Asset Management - Research Paper Example

Property Asset Management Introduction Merchiston (Edinburgh) Property Company has a number of property assets including land, infrastructure and buildings. Out of these key strategic resources the latter, i.e. buildings occupies a very important place in the asset portfolio of the company. Especially the company’s portfolio of office buildings in Scotland virtually presupposes a very attractive investment proposition. This report would concentrate on four key office buildings belonging to the company and would delineate a series of suggestions for the improvement of existing asset management principles thus obviating the need for closure or asset depreciation (Acharya and Dimson, 2007). The company’s current plan to reduce the number of employees from 100,000 to 75,000 is a strategic initiative which has been necessitated by cash flow and budgeting constraints. Despite a global property crisis in which rentals have been depressed while demand has been falling fast, the company has been able to manage its portfolio of assets with some remarkable success. Office asset/space management assumes a very complex dimension against the backdrop of rising uncertainties in the property market. Leases that vary from a few years to a number of decades have brought a mixture of results including very high real returns to losses in some years. This report will have a strategic focus on the outcomes related to property asset management perspectives and will outline in good measure the type of accommodation that enhances the asset performance paradigm of the company. While location and other variables have a very clear impact on the asset performance there is also a causal correlation between demand for and supply of property. Supply constraints have played a very decisive role in influencing rentals in the office space market. A dynamic feature of this aspect of the property asset management business is the particular portfolio’s ability or inability to add value to existing asset performance capability (Lucier, 2005). Therefore it’s the bounden duty of the Asset Manager to examine and adopt innovative asset management techniques to achieve organizational goals, including profit targets. 2. Analysis 2.1. Outline Property asset management includes such areas as office space management, portfolio, and national office management, discretionary and private client management, residential management and business parks. This analysis would primarily focus on the office space management sphere as the most attractive property related investment proposition. However it does not mean that other areas do not have a relevance to this analysis, especially concerning the impact of demand patterns on each. Such cross segmental demand patterns happen to influence each other to such an extent that an independent investigation of one particular variable is almost inconclusive without an adequate reference to the others (Burrell 2006). However this report would identify and address the relevant parametric variances of a variety of concepts. The structural setup within the asset management department of the company would have to be changed to add emphasis on the presently neglected areas of value creation such as adequate asset diversification and establishing market-centric performance measurements to determine the outcomes of new policy initiatives. One of such policy initiatives would include the overhauling of Human Resource Management (HRM) function. When the current FTE workforce is downsized by 25%, there would be some glaring gaps in some sections and as such the need for restructuring the entire departmental sphere is inevitable. This task needs to be carried out in successive phases and thus would require a clear focus on Training & Development (T&D) of existing staff to suit contingency demands. Contingency planning for restructuring ought to be based on what arises in the context of manpower supply constraints. As for the final organizational outcomes with regard to such contingency planning efforts to restructure and reconfigure workforce essentials, property asset management task would be more demanding in many respects. There would be a much bigger effort to rationalize the use of existing space on these four buildings and towards this end there would be a greater amount of market intelligence gathering. While such a rationalization effort would underlie the very restructuring program, there would be a sizeable amount of reorientation to meet the newly challenging marketing requirements (Kyle and Baird, 2000). 2.2. Property and company information The current space occupation patterns on the four office buildings are in the following order. 1. Building A: 75,000 square feet of prime office space on three floors of which currently only 88% is occupied. Located at the heart of the city of Edinburgh the building was put up just recently. Its current occupants vary from those long term lessees with 99 year leaseholds to lessees with a few years of leasehold. 2. Building B: 100,000 square feet of prime office space on four floors of which currently only 72% is occupied. This is the oldest of the company’s office buildings and is located little away from the heart of the city. As in the case of Building A, there is a mixture of leaseholds varying in duration. 3. Building C: 200,000 square feet of office space on six floors of which currently only 65% is occupied. Located little away from the city center at crossroads with a substantial downtown small office business presence the building accommodates a variety of lessees. While the rentals are little lower for most of the upper-floors, the ground floor and the first floor cost a little higher. 4. Building D: 400,000 square feet of office space on ten floors of which currently only 74% is occupied. This is the cheapest of all four and is located further away from the city center. Though it’s little older its maintenance contractors have been able to project its image as a prime symbol of success despite the negative impact of the global economic recession. Again the leaseholds vary from many years to a few (Tainer, 2006). Since the rentals are lower the company has been able to compete against rivals with some success. It must be noted here that despite a considerable amount of free space entailed by a constant fall in demand there has been a rise in cost in management per square foot of rented out space. On the other hand even the let out space has entailed a rise in maintenance cost per each square foot of space. This cost dichotomy has brought about overheads that have caused a downward trend in the company’s profitability. For instance a persistent fall in company performance ratios such as gross and net profits and sales volumes and a rise in cost per square foot of space rented out and managed has produced a series of corresponding problems for the management (Cummings, 2008). Even though the existing space can be re-leased to third parties in order to minimize overheads, there is the problem of continuing cost accumulations because despite re-leasing agreements re-lessees tend to doubt the expected returns on their investment. Subsequently they tend to bargain for the best possible rent. Re-leasing agreements might produce benefits to the company if such re-leasing of space takes place under extreme circumstances such as those in which re-leasing is allowed to be carried out by agents as a precondition for rationalizing space use to the maximum (Martinez, 2006). While prime space is priced in keeping with the company policy of minimizing costs and reducing operating expenses, the degree of price elasticity of demand for such property is very high thus leading to a persistent surplus of such property in the market. Even by the very standard of Real Estate Investment Trusts (REITs), the tax free earnings are not going to guarantee real returns against a persistent decline in them caused by a fall in asset performance. Thus price elasticity of demand for re-leased property could serve as a barometer of market sentiment among secondary investors whose demand is particularly influenced by demand swings in related markets (See above). Merchiston (Edinburgh) Property Company has been particularly affected by this property market-specific trend while intense competition from REITs has a far a reaching impact on the company’s current strategic operational and competitive environments. Though still there is a considerable amount of confusion as to what REITS are able to accomplish on their own in a highly competitive strategically diverse highly risk-prone property investment market, there is an equally formidable quantum of hope on the part of the average property investor and the market analyst that the UK property market has the potential for growth and sustainability despite a global downturn and rising pessimism among investors in general. It’s against this backdrop that the current scenario of the Merchiston (Edinburgh) Property Company has to be analyzed. Thus the subsequent developments at the company concerning property asset management would be connected with the above (Stubbs and Built, 2009). 2.3. Physical, legal, financial, geographic and design factors and their impact on the company Merchiston (Edinburgh) Property Company’s operational environment consists of physical, legal, financial, geographic and design dimensions. Thus its operational environment is of decisive significance in re-leasing and retention decisions of the management. The Asset Manager’s task is to clearly identify these parameters and pinpoint with a degree of certainty as to which type of accommodation would be desirable to be re-leased and which to be retained. The physical parameter in the operational environment has such a formidable impact on re-leasing and retention decisions of the company. For instance location related identity enables the company to build up its brand strategy in a manner that property leasing is facilitated by physical uniqueness (SEGRO, 2008, www.uk.reuters.com). While all four buildings have a degree of self identity each, there is a set of common characteristics as well. For instance the company has its own architectural identity though it has been little utilized in enhancing the brand identity or benchmarking efforts. In other words much of back-office space is unoccupied. Front office space is demanded for its qualitative impact on the customer. Physical characteristics such as length, breadth and width matter in leasing agreements to such an extent that lessees regard certain characteristics to be indefeasible even while they tend to inhibit progress (Hodgkinson, 2009). Physical characteristics of property are directly connected with productivity of the property itself. In other words the performance of the asset is greatly influenced by its physical characteristics. While the city center property has a greater demand the demand for those properties away from the center has been declining. It’s the latter category of property that requires favorable re-leasing agreements to re-lessees (McKinney, 2006). Legal aspects of office property leasing involve those agreements signed with lessees and probable litigation outcomes. Asset Manager’s task here is to ensure that the legal tightrope is walked with essential foresight to preclude any future legal hassles that would cost the company dearly. A few judgments in favor of lessees would often encourage them to resort to litigation despite the costs involved. However provisions in such agreements have to be drafted in a manner to avoid litigation and ensure that litigation does not drag on for months and years. Long leases could always pose a legal challenge to the company and re-leasing agreements involve many provisos that either seek to justify a certain stance of the re-lessee or his agent at the expense of the leaser. Legal concepts that underlie lease agreements on office properties embody a certain element of prejudice against eviction so that re-lease agreements run into difficulty the moment the re-lessee refuses to vacate premises on notice. Thus terms and conditions that are favorable to the leaser have to be included. However as already mentioned higher price elasticity of demand would have a negative impact on such agreements. A classification of office properties according to the degree of risk on ascending order would be a strategic imperative in the light of stiffer competition. The financial element is probably the most important in identifying which accommodation to be retained and which accommodation to be re-leased. This Asset Manager’s attention would be focused on the financial viability of retaining some of the properties that are less likely to produce a good return while those which would bring in good revenue would be re-leased. Financial performance of assets cannot be simply determined by factoring in the net return alone. NAV and NDY are two such measures adopted by realtors to identify the relative contribution of assets made to their success in the long run (Olsen, 2008). However neither measure acts as an independent metric to determine organizational outcomes on financial performance of a project or property. Despite this drawback many real estate companies make use of these metrics as barometers of success or failure. In the first place they serve as value parameters in otherwise difficult-to-understand contexts. Secondly and finally they serve the all inclusive purpose of being property valuation yardsticks (Fisher and Martin, 1994). Financial decisions that the company has to make in respect of what property to be retained and what property to be re-leased would be based on other variables too (Evans, 2008). For example strategically important financial decisions involving efforts to maintain a continuous positive cash flow position would be very crucial for the long term survival of the company and are determined in the context of the company’s liquidity position. In other words debt might ride roughshod over sound financial decision making if the company fails to identify higher yield assets or classes of assets. In fact the Asset Manager’s success or failure is basically determined by this aspect of the decision making process (Fishman, 2008). The geographic element, in identifying accommodation to be retained as against that to be re-leased matters to such an extent that at times the location of office properties even in the center of a city like Edinburgh, can pose a strategic problem to the company. Geography is associated with marketability of the property on aesthetics and physical infrastructure. Thus office properties tend to be demanded more when access-centric infrastructure with a minimum amount of aesthetics is available. Indeed Edinburgh incidentally is the most business-wise active region in Scotland (Knight, 2006). Design parameter would necessarily include regional geography as something much more influenced by attachment to sentiments. Thus Merchiston (Edinburgh) Property Company’s strategic operational environment is determined by this particular aspect to a greater extent. Above all businesses that occupy such property tend to identify themselves with the regional characteristics rather than the local aesthetics. In this context design capabilities of the company including interior design would play a very significant role in the Asset Manager’s decisions to identify which property to be retained against which property to be re-leased. 2.4. Typical skills and experience The staff ought to have a set of versatile skills and some experience to perform some of the most demanding tasks under extreme pressure. The current HRM function ought to be redesigned to achieve some organizational goals and manpower synergies. After reducing the headcount by 25% the company would have depleted workforce that might require some extra training and development of skills to meet market exigencies (Imperiale, 2006). In order to maintain a total floor area of 775,000 square feet on four separate buildings 75,000 employees would have to be put on a fast-paced move so that manpower shortages would not hinder the progress of work. Special skill development programs have to be designed and implemented immediately to meet this demand. Furthermore, such programs have to be in conformance with the skills requirements (Scarrett, 2003). If supply levels fall far short below the requirements there would be a drop in efficiency thus increasing costs and driving the skills matching efforts of the management out of balance. This Asset Manager hopes to develop and set worker productivity targets and incentives for motivation so that bottlenecks associated with manpower planning would be overcome. Employee motivation is of strategic significance in the current context of reduced staff strength and is of particular value in skills reassessment programs. Such programs have been adopted under a variety of circumstances by Asset Managers to overcome manpower constraints. A particularly striking feature of such programs is the fact that they tend to identify those flexible skills in employees such as IT engineers’ ability to design and troubleshoot seamlessly across a spectrum of applications. In this instance strategic managers would be required to adopt a similar versatile approach. 2.5. Typical performance criterion/ Recommendations This Asset Manager has particularly identified a very recent phenomenon, viz. financial element also assumes another significant dimension in respect of deciding between retention of property and re-leasing on the premise that certain sub-classes of office property such as Information Technology (IT) and Management Consultancies have a higher return on their individual investments (Keim, 2007). This is so even in the backdrop of a recession. On the other hand non-knowledge based businesses like home movers and cabs services are less likely to generate enough cash flows to meet the contingency financial requirements. Conclusion Merchiston (Edinburgh) Property Company has been operating for a number of years in the Edinburgh area with greater emphasis on office space leasing and management business. Its current efforts to face global economic downturn with an effort on overhauling its administration including cutting down on the staff by 25% would help the company to overcome some of the persistent structural problems related to effective HRM and overall asset performance. With the Asset Manager’s new role there would be a number of strategic functional level changes to the existing system so that labor synergies along with cost efficiencies would be hallmark of the new planning process. There will also be a number of new tasks to overcome the existing constraints related to identifying profitability areas for greater emphasis. The existing leasing agreements when expire would be reviewed thoroughly to have releasing agreements with a view to reducing costs that act as inhibitors under the current arrangements. While a considerable amount of Training and Development of staff would take place there would also be some reassessment of skills programs. In addition this would involve re-signing the existing labor agreements. REFERENCES 1. .Acharya, Shanta. and Dimson, Elory. (2007), Endowment Asset Management: Strategies in Oxford and Cambridge Investment, New York.: Oxford University Press, 2. Burrell, Jamaine, (2006) The Rental Property Managers Toolbox A Complete Guide Including Prewritten Forms , Agreements, Letters , and Legal Notices: With Companion CD-ROM. Florida : Atlantic Publishing Group 3. Cummings , Jack. 2008, Real Estate Finance and Investment Manual, John Wiley Sons, Inc, New Jersey: 4. Evans, Mariwyn (2008) Opportunities In Property Management Careers. New York: McGraw-Hill companies 5.. Financial Statement For SEGRO Plc: Interim Income Statement, 2008, from, www.uk.reuters.com 6. Fisher, Jeffrey. D. and Martin, Robert. S. (1994), Investment Analysis for Appraisers, Chicago: Dearborn Real Estate Education, 7. Fishman , Stephen (2008) Tax Deduction Guide (5th Edition). Califorina: Nolo 8.Hodgkinson, Liz. 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