Strategic Management of Corporate Real Estate - Assignment Example

Strategic Management of Corporate Real Estate Effects of Real Estate Decisions Corporate Real Estate: An Introduction The most basic three factors of production are land, labor and capital. Whereas labor and capital have attracted significant research, and various new factors such as technology have been added, land has attracted significantly less research interest. Over the last 2 decades, however, the concept of land as a strategic tool and asset is gaining traction in the research world. Corporate Real Estate can be defined as the land owned or leased by an organization to run its business operations and related activities (Brugeeman and Fisher, 2001). The most efficient usage of real estate assets in order to achieve its business objectives is known as Corporate Real Estate Management (CREM) (Brown and Arnold, 2003). The various activities that need to be taken care of CREM include property acquisition, development, management and financial management of the property (Gale and Case, 1989). The real estate for a corporate might either be acquired or may be taken on lease. In-spite of the fact that real estate constitutes as much as 10% to 30% the assets for major American and European companies between 1993 and 2001 (Bon, Gibson and Luck, 2002), the concept of Corporate real estate management is often taken seriously in the corporate corridors. Most of the corporate executives see real estate as a fixed asset and sunk costs and hence do not focus on the real estate strategy for the company. Others believe that since they are not in the real estate business, they do not need to focus on the real estate strategy of the organization. As a result, the real estate strategy has often been neglected as a part of the corporate strategy. However, in the recent years, real estate has taken precedence and is considered as a fifth strategic resource after capital, people, technology and labor. Importance of Corporate Real Estate Strategy Corporate real estate strategy plays an important role in the operations of an organization. With the growing competition and globalization, it is necessary that organizations have tight alignment amongst strategies of different business functions. This makes it necessary to have a corporate real estate strategy that is in synch with the corporate strategy. Over the last two decades, the concept of CRE has gained so much importance that researchers now suggest having a CREO who shall be involved in setting out the strategy and long-term planning of the real estate to achieve organization’s goals. Corporate Real Estate strategies Literature review of journal articles suggests a large number of possible real estate strategies. Whatever be the real estate strategy of a firm, the primary objective of the same shall be to increase shareholder value. At the same time, the corporate real estate strategy shall be drawn up for a long horizon. Following table consist of the various real estate strategies as researched in the various papers: Author Real Estate Strategy Nourse and Roulac (1993) 1. Occupancy cost minimization 2. Flexibility 3. Promote HR 4. Promote marketing 5. Promote sales and selling 6. Facilitate/control production, operations, service delivery 7. Facilitate managerial process and knowledge work 8. Capture real estate value creation of business Acoba and Foster (2002) 1. Real estate acquisition 2. Space alteration 3. Organizational structure 4. Sourcing strategies 5. CRM 6. Employee development 7. Workplace standards 8. Fee-for-service/ chargeback systems 9. Info management and IT Krumm and De Vries (2003) 1. Increasing productivity 2. Cost reduction 3. Risk control 4. Increase of value 5. Increase of flexibility 6. Changing the culture 7. PR and marketing Osgood (2004) 1. Quality of space 2. Cost of space 3. Quantity of space 4. Location of space 5. Technology of space 6. Practices for providing space Lindholm et al. (2006) 1. Increase value of assets 2. Promote marketing and sales 3. Increase innovations 4. Increase employee satisfaction 5. Increase productivity 6. Increase flexibility 7. Reduce costs O’Mara (1999) 1. Incremental strategy 2. Value-based strategy 3. Standardization strategy Table 1: Corporate Real Estate Strategies (Nourse and Roulac (1993); Acoba and Foster (2002); Krumm and De Vries (2003); Lindholm et al. (2006); O’Mara (1999)) A detailed study of the real estate strategies as researched by various authors indicates a large number of similarities. The first set of real estate strategies was developed by Nourse and Roulac (1993). The same model was used by other future researchers (Roulac, 2001; Lindholm et al, 2006). The corporate real estate strategy developed by Acoba and Foster (2002) does not have a productive strategy. Affects of Corporate Real Estate Strategies The three strategies of managing real estate O’Mara (1999) proposed three real estate strategies for organizations to choose from: incremental, value-based or standardization. If the managers of an organization are uncertain about the future developments in the organization, the company shall take an incremental strategy to manage the real estate. In this strategy, the firm makes use of space as and when required. This strategy enables the firm to adopt a flexible approach. However the firm practicing this strategy often fails to utilize its financial capital in the most efficient manner. Firms using value-based strategy choose real estate that is an expression of the values and the strategy of the company. This strategy is based on the communicative power of an organization. This strategy is expensive in terms of time and resource requirement. Standardization strategy is one where companies set fixed standards and guidelines for real estate. Any real estate decisions that need to be taken within the organization shall be based on these standards. The strategy leads to control on costs and resources along with economies of scale. Link Between Corporate Strategy and Real Estate Strategy The real estate strategy chosen by an organization depends upon various factors. The real estate decisions to be made by the company depend upon the importance of the real estate to the distribution of the company’s products. For instance, location and appearance is of significant importance in retail store chains. On the other hand, companies that make sales through indirect channels do not need to have an appearance on the main roads of a city. Besides this, the real estate decisions to be taken also depend upon the level of interactiveness required for running the business. Real estate decisions shall be made keeping in mind the expansion plans of the organization along with conditions such as availability of sufficient parking space. At the same time, the various corporate real estate strategies or decisions taken by an organization often have significant impact on the operational, financial and strategic aspects of an organization. The real estate strategy chalked out by an organization affects the strategic options available with an organization. At the same time, it also affects the economic independence of the organization. Hence, a corporate real estate strategy plays a significant role in the organization. Land as an asset is immobile and requires long-term commitments thereby increasing its importance as a business function. Real estate decisions taken by an organization also have significant impact on the other critical functions of an organization: Effect on the HR functions The real estate decisions made by the organization affect the HR function of the organization. A well planned and designed real estate premises enables an organization to attract and retain talent. At the same time, such a work place boosts the morale of the employees along with improving their satisfaction levels. These factors in turn enhance the productivity of the employees. It is necessary that the workplace shall be near necessary amenities such as restaurants, parking spaces or some enjoyment park. The movement towards a service economy and rapid changes in technology call for an efficient and productive work environments with physical, functional and financial stability (Lindholm and Leväinen, 2006). Effects on Corporate events such as Mergers, and JVs Real estate strategy as followed by an organization also affects the outcome of corporate events such as Joint Ventures, Mergers and Acquisitions. Companies having a concrete real estate strategy are the ones that are able to achieve the most significant returns from a merger. The value of the company that is being acquired depends on the real estate position of the target company. The real estate position of the two companies also affects the negotiations of the rate at which the final acquisition is done. Joint ventures differ from mergers in the sense that these involve only merging of only subsets of resources. Firms often enter into Joint Ventures with Real estate firms for the management of their corporate real estate. However, the effect of this JV on the stock prices of either of the two parties varies across companies. Effect on the image of the company A positive image of the real estate of an organization also results in a positive corporate image. For example, the use of an incremental real estate strategy signifies a flexible approach by the organization. However, value-based real estate strategy indicates that the company is very effective in communicating company strategy and vision. On the extreme side, a standardized strategy indicates a rigid approach. Effect on Profitability Corporate real estate has a significant direct and indirect impact on the profitability of a firm. While the price fluctuations of a rent and lease agreement can affect the profitability of the firm directly, drop in employee motivation as a result of poor physical work conditions will affect the profitability indirectly. The location of a retail store can significantly affect its turnover. Financial Effects Real estate affects the monetary situation of an organization in two ways: increase in the firm’s equity through appreciation if purchased or as a cost that reduces the companies’ profits if taken on lease. It is necessary to consider it as an asset which makes it strategically important. The operating costs of maintaining real estate is second only to payroll and the decisions in the area of real estate management has a major impact on the returns a company get in case of changes such as joint ventures, dispositions, sell-offs, spin-offs, and liquidation (Rodriguez and Sirmans, 1996). Effect on the Agency Costs Besides the financial impact of the real estate decisions, these decisions also affect the agency costs of the organization. A separate structure of ownership and control gives the managers to use the corporate resources appropriately and free cash flow. So, the real estate decisions taken by the managers affect the shareholder sentiments about the company. For instance, if the shareholders believe that the managers have chosen a real estate t in their own self-interest, then the agency costs of the company rises. However, if the shareholders feel that the real estate decisions are being driven by financial reasons, then the market rewards the organization through price increase. Real estate decisions therefore shall be made in such a way that the manager's self-interest is aligned with the interested of the shareholders. This will reduce the agency costs. Other Effects Effect on the likelihood of getting acquired: Ambrose (1990) in his study suggested that the management of the corporate real estate has a significant impact on the likelihood of an organization becoming a takeover target. He found out that the firm with higher real estate property will be more likely to become a takeover target. Decision to buy or lease: One of the major aspects of real estate management that has attracted significant research interest is the decision to buy the property or lease it out. For larger companies, the cost of capital is less and hence it is more economical to purchase then to lease. However, leasing can offers time and space flexibility (Ebert, 1987). Nourse (1994) in his paper concluded that firms which lease more than they own have their real estate strategy more closely linked with the corporate strategy. Conclusion Corporate Real estate plays an important part in the operations of an organization. Every organization shall have a robust corporate real estate strategy that shall be in synch with the company strategy and vision. The real estate decisions taken by the managers often have significant impact on the aspects like HR function, agency costs, financing costs, corporate events such as mergers, profitability and image. References Acoba, F.J. and Foster, S.P. (2003). “Aligning corporate real estate with evolving corporate missions: Process-based management models”, Journal of Corporate Real Estate, Vol. 5 (2), pp.143-164. Ambrose, W. B. Corporate Real Estate’s Impact on the Takeover Market, The Journal of Real Estate Finance and Economics, 1990, 3:4, 307–22. Bon, R., V.A. Gibson, and R. Luck. Annual CREMRU-JCI Survey of Corporate Real Estate Practices in Europe and North America: 1993–2001. Facilities, 2002, 20:11/ 12, 357–73. Brown, K., A.L. Arnold, J.S. Rabianski, N.G. Carn, P.D. Lapides, S.B. Blanchard, and E.P. Rondeau. Managing Corporate Real Estate. New York, NY: John Wiley, 1993. Brueggeman, W. and J. Fisher. (2001). Real Estate Finance and Investments. McGraw Hill, USA. Ebert, L. (1987). “Lease vs. buy: The Corporate Perspective”. Real Estate issues, Vol 12(1). Pp 15-20. Gale, J. and F. Case. (1989). A Study of Corporate Real Estate Resource Management. Journal of Real Estate Research, Vol 4(3), 23–34. Krumm, P.J.M.M. and De Vries, J. (2003). “Value creation through the management of corporate real estate”, Journal of Property Investment and Finance, Vol. 21 (1), pp.61-72. Lindholm, A. and Leväinen, K.I. (2006). “A framework for identifying and measuring value added by corporate real estate”, Journal of Corporate Real Estate, Vol. 8(1), pp 38-46. Lindholm, A., Gibler, K.M. and Leväinen, K.I. (2006). “Modeling the Value-Adding Attributes of Real Estate to the Wealth Maximization of the Firm”, Journal of Real Estate Research, Vol. 28 (4), pp. 445-474. Nourse, H.O. and Roulac, S.E. (1993). “Linking Real Estate Decisions to Corporate Strategy”, The Journal of Real Estate Research, Vol. 8 (4), pp. 475-494. Nourse, H.O. (1994). “Measuring Business Real property Performance”. Journal of Real Estate Research, Vol 9(4), pp 431-444. O’Mara, M.A. (1999), Strategy and Place: Managing Corporate Real Estate and Facilities for Competitive Advantage, The Free Press, New York, NY, p. 349. Rodriguez, M. and C. F. Sirmans.(1996). Managing Corporate Real Estate: Evidence from the Capital Markets, Journal of Real Estate Literature. Roulac, S.E. (2001). “Corporate Property Strategy is Integral to Corporate Business Strategy”, The Journal of Real Estate Research, Vol. 22 (1/2), pp.129-152. Read More