An insight into Corporate Real Estate Management

Introduction

It is a projection that the two thirds of humanity will live in the cities by the end of the next 50 years (BBC, 2006). Along with the fast growing economies of the developing and emerging nations like China, India, UAE – the real estate market and the industry has realised great successes, pulling the economic development significantly, and contributing a lot to the nation’s prosperity. Today, the real estate construction industry assumes more tasks. China in 2008 has seen over RMB 3,000 billion entering real estate construction (Gao, 2009). India, on the other hand, could see $12.1 billion investment in real estate sector (IBEF, 2009). This has turned the focus on to the cost control and regular management in the real estate industry. The investments in this industry are very high and lasting, thereby encouraging a lot of people, institutions and agencies to take active participation in the construction projects. This shift has resulted in multiple levels with the cost control and management becoming more complicated (Gao, 2009). An inefficient realisation of the objectives of the project could lead to great wastage and would later bring more pressure on the property management sector.
Literature by both management theorists and practitioners perceive that any business will perform successfully if it understands what its business is and focuses on aligning the operational decisions and implementing them in accordance to the objectives (Charles, Grantham & Ware, 2007). Strangely in the case of real estate industry, this connection is missing, wherein it is not clear how the businesses address their operating decisions and implements their strategy decisions though the real estate decisions (Krumm & Vries, 2003). Nourse and Roulac (1993) argue that surveys of corporate managers indicate a curious ignorance and indifference in relating their real estate assets to the overall strategies guiding their organisations.
This paper tries to develop an insight on the various facets of real estate management – including financial constraints, cost control and management. It highlights the key reasons for the neglect of professional real estate management in organisations. It also showcases the paradigm shift in organisations regarding the valuation of real estate assets in relation to their overall corporate strategies. Later it explains the responsibilities and skills that professionals require to effectively nurture a sustainable future for real estate management industry.

What is Real Estate Management?

Akin to the functions of management in any other business, real estate management deals with the operation of residential, commercial and industrial real estate (Muhlebach & Alexander, 1998). This involves management of the personal property, equipments and physical capital assets which are used to build and maintain the property and other end deliverables – the built environment. With the growth of private property ownerships, the real estate has developed into an important area of business and is commonly termed as commercial real estate. Purchasing real estate assets require significant investments, with each parcel of land having unique characteristics, so the industry has evolved into many distinct fields (Charles, et al., 2007). Often specialists are on to valuate real estate assets and facilitate transactions.
Property or real estate management also involves the systems, processes and manpower that are required to manage all the acquired properties including acquisitions, utilization, control, maintenance and disposition. As per Nourse and Roulac (1993), the real estate management decisions include fourteen critical criteria, i.e. location, quantity, tenancy duration, signage/ identity, building size/character, building amenities, exterior quality, company space, mechanical systems, information and communication systems, ownership rights, financing, control and risk management. Within each of these fields, a business may evolve in a particular type of real estate asset, such as commercial, residential or industrial property. In addition, almost all the construction businesses effectively have a connection to real estate industry (Charles, et al., 2007).

Corporate Real Estate Management: Financial Perspective

Corporate Real Estate Management (CREM) concerns the businesses, whose central objective is the long-term business growth through establishment and maintenance of the competitive advantages to manage their assets including buildings and lands at their disposal (Muhlebach & Alexander, 1998). Therefore, the competitiveness of both the corporate services or products and resources or assets at disposal, plays an important role. CREM primarily deals with the establishment and maintenance of a close match between an organisation’s business and property strategies (Edwards & Ellison, 2004).
Regardless of the increasing awareness of challenges or the interest in managing businesses real estate portfolio, the financial perspective is still traditional with focus on – net present value (NPV) and cost per metre or per FTE focus (Krumm & Vries, 2003). While current management practices and the vast literature explain various concepts for the management of corporate resources such as capital, information, technology and personnel, the conceptual treatment of property or real estate as a corporate resource has largely been neglected. Nourse and Roulac (1993) argue that though most organisations explicitly consider real estate transaction towards meeting their real estate strategies, vast majority of them not only fail to make any such consideration but also do not have a formal real estate strategy. This indifference is quite strange because the total amount of corporate real estate is much more than the total real estate investment portfolio. It is this reason that stock market, investors and analysts were not able to grasp the true potential of corporate real estate (Evans et al, 2001).
On the contrary, Rodriguez and Sirmans (1996) state that stock markets are aware of the real impacts of decisions pertaining to corporate real assets and that the markets respond accordingly. Krumm and Vries (2003) view that the impact of corporate real estate on the corporate performance is ambiguous – one hand it involves pure financial relation based on generally accepted accounting standards and other hand its indirect influence is realised through supporting the other core business functionalities. However, in this highly competitive market, the increasing pressure from competitors and stake holders has triggered a radical thinking about the resources, competencies and the capabilities (Edwards & Ellison, 2004). The idea of value-addition has forced many real estate departments to prove their added value to the organisation (Krumm & Vries, 2003). This transition has not only changed the attitude of the organisations towards internal services and corporate centres but has also redefined the role and position of the staff and the departments.

Cost structure and Challenges of Real Estate: Project Perspective

Nourse and Roulac (1993) in their seminal study concluded that “the real estate is 25 per cent or more of corporate assets and occupancy costs represent 40 to 50 per cent of net operating incomes”. For the construction projects the costing structure of the real estate projects are mainly composed of four parts (Ma, 2009). It includes land cost that accounts for 30 per cent, construction installation cost that accounts for 20 to 50 per cent, cost for equipments and machines that accounts for 1 to 3 per cent and other costs that account for more than 15 per cent of the total cost. It includes the cost for research and design, project supervision, and the cost for infrastructure. In special, the cost for management usually surpasses the budget limits (Gao, 2009), which is the largest part and that is hard to control in real estate construction projects.
Gao (2009) argues that there are some serious problems that exist in the cost control and management of real estate projects. He argues that some projects are so inefficiently managed that the companies fail even to follow the basic design parameters, leading to large costs of construction. Some emphasise on the control of quality and period but struggle to control the cost parameters (Charles, et al., 2007). Some companies perform illegally while bidding, which results in failure to control project cost well (Gao, 2009). Another potential threat to quality is the popularisation of assigned subcontracts and various subcontracts. Also the delays in payments especially for workers’ wages, is a serious problem. All these activities and practices make the control on the cost of real estate construction difficult and challenging, which is detrimental to the goals of sustainable development of real estate industry (Charles, et al., 2007).

Responsibilities and Professions in Real Estate Management

The growing emphasis in organisations for value addition through real estate holdings has greatly increased the potential of professional growth in real estate industry. Maintaining existing property and investing in new real estate has always been favoured and recognised as a major source of wealth creation (Krumm & Vries, 2003). Property Management has emerged as a key function in this process – that is applied to maximise the returns through effective administration of property. Besides, it also caters to all the disciplines implemented on rental policies and property rules. In other words, ‘Property Management’ is a career profession that is part of the growing business industry (Charles, et al., 2007).
Unlike the property managers who work within the organisations, there are external property advisors – who are industry insiders and play a vital role in guiding organisation through the real estate market changes. Property advisors provide sound guidance and help in making sustainable real estate decisions that are profitable and open a steam of continuous income. Following are key responsibilities and roles played by property managers and property management companies (IREM, 2009):

• Manage multiple aspects involved in the ownership of real estate
• Manage income and expense related activities
• Manage construction, development, maintenance and repair of real estate assets.
• Initiate’litigation’ with insurance agencies and contractors etc.
• Oversee legal aspects related to the assets including non-payment, harassment, public nuisance, etc.

As society changes and expands, “real estate managers respond to a diversity of problems – either to capitalize on or to minimize the effects of changes on the real estate in their care” (IREM, 2009). Real estate managers and advisors tend to have a direct and tangible impact on people.

Professional skills required for Real Estate Management

Krumm and Vries (2003) argue that the large degree of insecurity in real estate decision making is also a major reason why corporate real estate is often overlooked. The role of property managers or advisors is henceforth very important as their advice is crucial and could result in large investments. Following are some characteristics of an ideal property manager (IREM, 2009):

• Updated knowledge about new laws and practices in the given localities, cities and states.
• Updated on local ordinances.
• Very honest while enforcing property rules and rental policies.
• Well oriented and organized with paper works.
• Good communication and computer skills.
• Should not refrain from working with the public.
• Should have a strong sense of duty and commitment.

Conclusion

Corporate real estate management is predominantly approached with an economic point of view – mostly concerned with the financial gains of cost minimisation, often at the expense of other strategic priorities. This paper however identified a growing paradigm shift among organisations towards the valuation of their real estate assets. It emphasises the fact that an organisations real estate management decisions will be effective depending on the extent to which it supports the overall business objectives. This can be achieved only by careful consideration of how the real estate assets contribute to corporate strategy and in turn how the real estate operating decisions support the real estate strategy. This transition in corporate attitude has resulted in changing relations among the various corporate centres and the operating companies. In addition it has also reshaped the traditional role and the positions of staff departments. This realignment should result in a more strategic orientation and would enable the organisation to effectively relate productivity to shareholder value.