week 7 - asset and CRE management

Question 1

what is asset management

Answer 1

Is it property or assets that are being managed or does it really matter?
Why?
o A more competitive world - “the global economy”
o Increased emphasis on efficiency of capital and production costs

Past definition of asset management included shares, bonds and similar assets but now also includes A-REIT’s

Question 2

define coperate real estate

Answer 2

= A term used in a broad sense to refer to real estate owned by a corporation, whether it is for investment or not. This includes freehold and leasehold real estate that is used by an organization for its own productive purposes, whether or not the corporation also considers the same real estate to be an investment

Question 3

define strategic property

Answer 3

Necessary real estate assets for LT business operations

Question 4

define landmark / flagship property

Answer 4

Cooperation’s image/culture, own or lease?

Question 5

define core property

Answer 5

Needs to control for medium term operations e.g. industrial/commercial facilities

Question 6

define peripheral property

Answer 6

– Needs on a short term basis for intermittent cyclical functions/operations (leased)

Question 7

define surplus property

Answer 7

disposable property

Question 8

compare the roles of a property manager (commercial)

and a CRE and asset manager

Answer 8

property manager:
leasing and lease admin
rent collection
tennant lisaon
expense management and contract 
supervision
refurbishments

CRE and Asset manager:
supervision of property managers
focus on investment returns
project management for capital works
Acquisition, retention and disposable (due diligence process)
Life cycle management (planning)

Question 9

CRE managers focus on

Answer 9

o Financial planning and reporting (strategic operational)
o Strategic business objective (buy, sell, lease)
o Workplace strategy (efficiency, occupancy costs and ratios)
o Service delivery (operation facilities)
o Capital management/expenditure
o Project Management (refurbishment, relocation)

Question 10

explain workplace related duties

Answer 10

o Align workplace to business values, brand, vision and culture
o Determine best location based on business uses (e.g. sales, back of house, production)
o Understand occupancy costs and ratios
o Ensure delivery of occupant services

Occupancy costs and ratios of reporting:
CFO’s are ty[ically interested not only in overall property costs but benchmarking such as:
o	$ per sqm
o	sqm per workstation 
o	Property as a % of sales
o	Occupancy costs / M2
o	Occupancy costs / person
o	Lease cost as a % of occupancy cost
o	Asset value / person

Question 11

explain financial and business planning

Answer 11

Strategic:
o Getting to know the business
o Property plan to support the business plan  Larger corporates formalise this process
o Aligned to business objectives to support their delivery
o Own vs lease
Operational:
o Budgeting and cost recovery (internal rents) Occupancy planning
o Project planning

Capital management:
o Understand impact to the balance sheet

Economic Value Added is a proprietary tool and is a very successful performance metric used by companies and analysts
o Looks at more than just net profit
o Includes cost of capital employed

WACC

Question 12

write out the waco formula

Answer 12

Re=cost of equity
Rd=cost of debt
E=market value of the firm’s equity
D =market value of the firm’s debt V=E+D
E/V =percentage of financing that is equity
D/V =percentage of financing that is debt

do example in notes too

Question 13

explain Capital management

Answer 13

The most obvious issue for the CRE manager is own vs lease - Why??????
Traditionally if a business needed new premises they tended to buy or build - What changed?

Capital management
o Why is real estate a good investment for a super fund but not necessarily a major corporate?

o	Cost of Capital! –it varies!
o	Why not lease everything then?
o	Some do, but you need a sound credit rating
o	backed by some assets/equity
o	Leverage and risk
o	Flexibility

Question 14

Outline the main difference between an asset manager and a corporate real estate (CRE) manager.

Answer 14

Asset Manager:
o Supervision of property/facility managers (client representive)
o Focus on investment returns: short, medium and long term
o Project management for capital works refurbishment
o Acquisition, retention, disposal (due diligence process)
o Life cycle management

CRE Manger:
o Align property strategy to business objectives (buy, sell, lease)
o Focus on efficient and effective workspaces (Based on usage types, occupancy ratios/costs
o Project management for capital works, refurbishment, relocation
o Workplace as a reflection of business values and brand

Property Manager (commercial/industrial)
o	Leasing and lease
o	Rent collection
o	Tenant liaison
o	Expense management
o	Maintenance and contract supervision
o	Refurbishments

Question 15

Outline the key areas that a corporate real estate (CRE) manager focuses on and why.

Answer 15

o Strategic property management of cooperate assets – property assets that are owned or leased
o Business structure – buy, sell, lease property, consider locations
o Returns on use of buildings
o Accountability of use

Question 16

You are reviewing the capital expenditure budget for a number of commercial assets and each forecast expenditure item has been classified in one of the categories on the right.
What decision making criteria would you use to decide which items to approve for expenditure

Answer 16

income generating (e.g. creation of a new leasable area, additional signage space)

Safety (e.g. directional signing near speed bumps)

Environment (e.g. investment in new equipment or product that is more environmentally friendly)

Code compliance / statutory (e.g. disabled access, essential services upgrades

Directionally (e.g. rebranding building foyer

Each expenditure have a variety of positive consequences attached
They are all capital expenditure items hence the decision-making criteria will depend on:
Importance of the expenditures
Compliance with OHS
Income generating
Highest Priority would be the expenditure which can generate Income or Profit
Other factors like Good Corporate Citizen and Brand Name can play a part

Question 17

2. Outline the key areas that a corporate real estate (CRE) manager focuses on and why.

Answer 17

Strategic property management of Corporate assets – property assets that are owned or leased
Business structure – buy, sell, lease property, consider locations
Returns on use of buildings
Accountability of use
Profitability and ROA

DRAW BLUE pyramid in notes

Question 18

Outline the key areas that a corporate real estate (CRE) manager focuses on and why.

Answer 18

Financial planning and reporting – strategic operational
Use of buildings / workplace strategy – ratios of staff and offices to work spaces …….
Efficient and effective workplaces –
Usage types,
Occupancy costs and ratios
Reporting
Business planning – strategic and operational
Capital management
Project delivery – works, refurbishment, relocation
Service delivery/Facility Management
Align property strategy to business objectives Buy/sell/lease
Workplace as a reflection of business values and brand

Question 19

You are at real estate business function and overhear two people you know well debating about differences between CRE and more traditional property management.
One argues that CRE has evolved to become a more specialist sector of property management.
The other argues that there is little or no difference and in fact, the only difference is the CRE manager works “in-house”.
That is, they are an employee and therefore will only manage the services (just like a facilities manager) as they don’t get involved with leasing etc. They ask your opinion.
Explain your response describing in detail how CRE differs from traditional property management

Answer 19

To support your arguments use the 2008 JCRE article on CRE to list the categories/classes of property in this area and the six sub categories
Explain to your friends how CRE uses performance measures and financial analysis to bench mark their activities
Briefly outline what measures are used.

Debunk the myths in the above statement regarding CRE as ‘only managing the services’

strategic property =The corporation needs to own and control for its operation and long-term business strategy

Land mark / flagship = Displays/states the corporation’s image/culture, property that the corporation needs to control either through ownership or lease.
Usually, medium- to long-term leasing arrangements put into place

Core property = Company needs to control (not necessarily own) for medium-term operations
e.g. includes industrial, retail and commercial facilities from which the company operates.

Peripheral property = Company needs on a short-term basis for intermittent cyclical functions/operations.
Property is nearly always leased, e.g. extra warehousing space and serviced office space.

Surplus property = Should be under constant review as the company needs and wants change.
Does not fit into the corporation’s long or medium-term strategy or business plan

subgroups:
building - The cost of buildings included in the company’s property plant and equipment account.

construction in progress - The capitalised amount of plant and equipment and construction that has not been completed.

land -The cost of land used in the production of revenue

leases - The capitalised value of leases and leasehold improvements included in property plant and equipment.

natural resources = The cost of irreplaceable natural resources including mining properties, oil fields and timber lands.

CRE manager role
More about managing the property assets from purchase of land,
Managing the construction process and building – retain/lease.
Align property strategy to business objectives (buy, sell, lease)
Focus on efficient and effective workspaces (based on usage types, occupancy ratios/costs)
Project management for capital works, refurbishment, relocation
Consider the Workplace as a reflection of business values and brand

Question 20

Describe the capital management measures and reporting requirements a CRE manager is likely to need when undertaking their duties. In your answer explain what information these measures provide.
Calculate the WACC for the company which wishes to raise funds for purchase of new retail space. They plan to raise money by issuing $10 million new shares with an expected return of 15%, they will also issue $5 million of debt. The cost of debt is 12% and their tax rate is 30%. What is their WACC?

Answer 20

Formula
Re = cost of equity
Rd = cost of debt
E = market value of the firm’s equity D = market value of the firm’s debt
V = E + D;
E/V = percentage of financing that is equity
D/V = percentage of financing that is debt Tc = corporate tax rate
WACC = E/VRe + D/VRd * (1-Tc)
WACC = 10/150.15 + 5/15.012 * (1-0.30)
WACC = 0.1 + (0.04 * 0.7) = 0.1 + 0.028 = 0.128 = 12.8%

Understand a balance sheet
Understand sources of funding
Debt & equity
Understand the differing costs
Understand the environment the CFO works within
EVA (economic value added)-Profitability
WACC (weighted average cost of capital)-Combined debt and equity capital to give weighted average
NPV/IRR (Net present value & Internal Rate of Return)-Key determinant of whether to undertake an investment/project: NVP  +ve. IRR > Required Rate of Return
ROI & ROE (Return on investment/equity)-Important measures of return to shareholders
IFRS & USGAAP-Accounting standards–Reporting requirements

‘Economic Value Added-EVA’
Often called economic profit – Shows the financial performance based on residual wealth
Measure the cost of capital and deducts it as a cost.
The incremental difference in therate of returnover a company’s cost of capital.
Essentially, it is used to measure the value a company generates from funds invested into it.
If a company’s EVA is negative, it means the company is not generating value from the funds invested into the business.
Conversely, a positive EVA shows a company is producing value from the funds invested in it.
The formula for calculating EVA is:Net Operating Profit After Taxes (NOPAT)-Invested Capital * Weighted Average Cost of Capital (WACC)

Question 21

Review the Salvation Army Media Release on relocation of HQ in Sydney. They have undertaken a similar strategy in Melbourne.

What factors were considered in the own/lease decision in both Melbourne and Sydney?

ii. Consider the pros and cons of leasing or owning property for a corporate compared to the government or non-govt organisation (NGO)  iii. What benchmarking measures might they utilise in their measurement of performance

Answer 21

Factors to consider:
Is it a core location/core property? What are their needs?
Do they need high cost CBD building and location or outer suburban, low rise building
Accommodation, training class rooms, space, activity areas
How valuable is the CBD land vz purchase of more space, greenfield land
Should they refurbish and stay?
What opportunities arise?
Rent out CBD property to fund acquisition

Consider the pros and cons of leasing or owning property for a corporate compared to the government or non-govt organisation (NGO)
Leasing property
Owning property
Prepare some key points to discuss
Consider some of the discussion of NAB and its product analysis in last seminar
A. Govt-owned buildings have different criteria to private corporations – their brief is to provide service and accountability vz profitability and returns for private Co’s.

Question 22

pros and cons of leasing

Answer 22

pros
Can negotiate on refurbishment or rent concessions
Can leave at end of lease if building too old, no longer fit for purpose
In property cycles where office space plentiful can obtain rent concessions
New buildings meet sustainability guidelines, if not negotiate with landlord

cons:
Need to be “qualify” as a potential tenant
Need to show your history on Profit/Loss, credit report…etc.
growth pattern of tenant – for eg, if a retail tenant – then location, other complementary businesses may be important
Higher cost to alter space to suit

Question 23

pros and cons of owning

Answer 23

pros:
Flagship building that represents your corporate culture
Have purpose built building
Part of property portfolio
Location – could be a pro for either leasing owning – if in CBD may already have best location, or could move to a better location if leasing

cons:
High UPFRONT cost of owing building
Opportunity cost of capital (other investments that could have used funds for and earned higher return on capital – if can obtain more than the firm’ own WACC(Weighted Average Cost of Capital))

Question 24

7. (iii) What benchmarking measures might they utilise in their measurement of performance

Answer 24

See Q5 and 6 for more points that would be considered here.
Rental returns
What benchmarking measures might they utilise in their measurement of performance
Profitability – EVA, ROA
Work space utilisation – ratios of staff, desks etc per M2

Potential sale price of CBD buildings

CFOs are typically interested not only in overall property costs but benchmarking such as
$ per sq m
 sq m per workstation or FTE
property costs as % sales
Occupancy costs /m2
Occupancy costs/person
Lease cost as a % of occupancy cost
Asset value/person

read through benchmark notes

Question 25

occupancy costs and ratios

Answer 25

$ per square metre (or FTE)
square metres per FTE* (or workstation)
utilisation rates
property costs as % of sales 
 (business revenue)