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Real
estate as a corporate strategy In terms of economics, the different roles played by real property in an economy where all three markets are in operation or in wide-ranging organisations where a variety of real estate activities are performed can be discussed under three main topics: a factor of production, an investment medium, and a corporate asset. Real estate provides occupational or operational space for carrying out varied type of production and service delivery activities. Irrespective of the type, size and nature, every single activity needs to be located somewhere for making, storing and selling goods or supplying variety of services. Every organisation makes use of either open or built space to meet their occupancy needs. Real
estate, the land and buildings so used to house operational activities
of the organisations whose primary or core business is not related
to any real estate activity, is termed Corporate Real Estate (CRE).
Medium
of investment Mainstream investors strategically manage their property assets based on portfolio goals and risk-return parameters. Unlike company shares, property is not a standardised investment. Physically it is immobile. Financially it is relatively illiquid. Acquisition, disposition and development of real estate is time consuming and costly. In consideration of all these factors, one can conclude that real estate investment is an intricate business. Real
estate is a prime corporate asset of both real estate, as well as
non-real estate entrepreneurs. As a fixed asset it forms a major
part of asset values in the balance sheet of the organisations holding
either CRE or IRE extensively. Organisations basically use two forms of strategy at corporate and business unit level. Corporate strategy covers the issues that affect the total network of an organisation at the highest level of management. Business unit level strategies of different units of a corporate body plan out their activities in line with the corporate strategy. A slump
in the property market coincided with economic recession, technological
change and global competition badly affecting the corporate sector
in several countries in the ‘80s, and the strategy became
problematic. CRE
research Every
study and research on CRE was undertaken in the developed world
where property assets make an important contribution not only to
the balance sheet of the companies, but also to that of the economy
as a whole. CRE
in Sri Lanka The activities involved with the investment and development of real estate are still in a premature state in this country. Apart from the small-scale individual investments in real estate, only a handful of significant real estate investment properties were added to the building environment. The story behind CRE in Sri Lanka is somewhat different. It has a fairly long history running over several decades. The extent and value of commercial real estate assets held by the non-real estate organisations all over the country increased during the recent past. In comparison with the IRE, CRE seems to be a significant asset. Non availability of even basic information makes CRE a hidden asset and the organisations holding CRE extensively are not in the limelight. In par with most other countries, it looks that non-real estate organisations own much more property assets than the real estate organisations in Sri Lanka. The general understanding is that Sri Lanka Railways, the Ports Authority, Road Development Authority, and Colombo Municipal Council are among a few property-rich non-real estate organisations in the public sector. Sri Lanka Telecom too was a government establishment which held a fairly large amount of property assets scattered throughout the country. Today it is a public quoted company. Recently I prepared a report on the management of Sri Lanka Railway properties. It is interesting to know that the total requirement of land to establish the railway service in Sri Lanka was acquired over several decades from the 1860s to the end of the 1920s. The total extent of railway land all over the country is said to be about 13,700 acres. This amount of land was acquired for the construction of railway tracks, stations, yards and other structures to accommodate many more allied functions. Railway technology and service management thinking prevailing at the time would have been the primary factors of making decisions with regard to the extent of land required. Political and economic factors would have decided the areas to provide railway services. Railway technology, management thinking, political environment and economic needs are totally different today. The present management should decide how much of the property assets in hand should be kept for current and future needs and what extent can be released. Out of the total extent, about 8,600 acres has been used for tracks and buildings and 2,600 acres have been leased out. The balance is reserved for future development. Most of the balance of vacant land and areas of some operational properties are reported to have been encroached upon. Apart from the extent of land, information on the buildings and other structures are not available. Proper management and effective use of this invaluable asset would be highly beneficial to the core function of Sri Lanka Railways. In addition to the public sector, private sector organisations also hold a fairly large amount of property assets. Among varied types of such organisations, the listed companies are prominent and are of different types and sizes. Information on the property assets owned by every private company is not readily available. The documents published by the Colombo Stock Exchange carry basic information in connection with the listed companies. The annual report is the main source of information published by a company. Listed
companies and CRE Orientation towards management during this period was poor and the role of CRE was confined only to facilities management or simply building maintenance. Over the past three-and-a-half decades, the Americans have developed strategies to manage CRE and have approached the fifth era identified as the Strategic Era. They are now capable of producing desired results of their strategy in CRE management. It is interesting to verify whether the Sri Lankan corporate sector at least by now has reached the pre 1970 Custodial Era position of their counterparts in the US in CRE management. The property portfolio of the Sri Lankan corporate sector appears to be built mostly by legacy than by planning. The acquisition of land and property by an organisation requires a strategic approach rather than looking merely at occupancy and price factors. With regard to management, it is evident that the common practice of almost every organisation in Sri Lanka is to have a building maintenance staff. The general practice in Sri Lanka is to attach the maintenance staff either to administration or finance divisions. In addition, the real estate matters are handled by respective managers. The top management probably gets involved in real property matters only when a property is purchased, sold, leased, developed or mortgaged. This is generally the practice both in the public and private sectors. However, a detailed study is necessary to ascertain whether corporate Sri Lanka is more or less in the Custodial Era, the primary era in the management of CRE or gone beyond. The opening of the economy, globalisation of the business operations and other competitive pressures are forcing companies to re-evaluate their strategies. This is a good opportunity for the top management of public and private non-real estate organisations to rethink their property assets and understand the important contributions that they can make to the core business. Further, they must pay attention to a couple of important factors with regard to the value and cost of property. How significant is the real estate asset on their corporate balance sheet? How large is the operating cost of real estate? A comparative study of the value and cost of property with other prime resources would bring a feeling on the importance of property. If all these factors are logically considered, there would be no doubt that top management would recognise the important contributions that property can make to support the enterprise’s competitive advantage and core competency by addressing customers, employees and business processes. Researchers of CRE management have identified several steps for a company to follow in order to make better use of CRE and achieve their corporate objectives. Towards active management, the most vital step is the formation of a CRE unit, division or a department to take over the task. Some organisations look for more flexibility of managing CRE and form separate real estate subsidiaries. This step has already been taken by certain organisations, notably in the banking sector. The factors, such as the sector of the business, corporate philosophy, the overall management set up and the size of the property portfolio of the organisation, are decisive in the determination of the shape of the real estate management arm to be formed. The property divisions so established by enrolling capable hands could bring better results provided such divisions are comparable with other divisions that have their own lines of communication within the corporate hierarchy. Finding required professional input to fill the gap that exists in the field of CRE management would be a critical issue. Large organisations have assembled a lot of freehold and leasehold property assets within Colombo, its immediate suburbs and other parts of the country. Information of these assets is a prime resource to the managers and it makes a considerable impact on their efficiency and effectiveness in planning and management. Their tasks require information on the property, the management and performance of the property, and the personnel dealing with property including the quality of work. Collection of information on property requires proper identification of the property assets owned or leased by an organisation and compiling a property inventory. It is evident that some organisations do not have even a list of their assets. This is the general situation in most public sector organisations. They often look for property details in a hurry when confronted with some property issue. A
post-tsunami search of vacant state land for resettlement of affected
households by several public-sector organisations can be traced
as a good example. It took several months to find suitable land
for resettlement Broadly, physical, legal and location attributes make a comprehensive database. This needs to be updated on a regular basis so that most reliable and up-to-date information could be made available to property professionals and managers to carry out their activities. In addition to the above information on property that is available with most private sector organisations, the database is incomplete without adding information on property management and performance. Property management information would encompass much more data that could be used by property managers, as well as other managers. Conclusion The message of property-running costs has not yet reached top management. The computation of the total running costs has not been considered as an important task. Not only is real estate vital from a cost/value perspective, but rather how it contributes to the whole business strategy. It is timely for corporate Sri Lanka to take initiatives to transit from facilities management to economic, efficient and effective real estate management. The writer is a Fellow of the Institute of Real Estate and Valuation, Sri Lanka and holds a Master’s degree in Urban Land Appraisal from the University of Reading, UK. He is the Managing Partner of REAPS – Real Estate Agency and Property Services. He can be reached at sena@makestuffhappen.co.uk. |
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