potentials of strategic corporate real estate …. 1, no. 8, september 2013/potentials of... ·...

International Journal of Economics, Business and Finance Vol. 1, No. 8, September 2013, PP: 235 -248, ISSN: 2327-8188 (Online) Available online at http://ijebf.com/

235

Review article

POTENTIALS OF STRATEGIC CORPORATE

REAL ESTATE MANAGEMENT: SOUTH

AFRICAN PERSPECTIVE

IJASAN Kolawole C

School of Construction Economics and Management

University of the Witwatersrand, Johannesburg, South Africa

E-mail: [email protected]

______________________________________________________________________________

Abstract Purpose: The purpose of this paper is to reevaluate the concept of Corporate real Estate especially for companies

who often undermanage real estate assets because of the „we are not into real estate syndrome‟.

Methodology/ Approach: The paper reviews past research and studies on CRE and CREM from different parts of

the world. Summaries of their findings are compiled and presented in a snap view for easy referencing. Limitations: This research only provides a review of past works on the benefits and challenges of CRE and CREM,

with a focus on South Africa, hence it doesn‟t how CRE can be implemented as it is expected that there might be a

cross-cultural variance of CRE perception by the local companies

Findings: Real estate management is seemingly on the backburner of strategic decision making within most

companies. The situation is even grimmer in South Africa as there is very little attention paid to it; nevertheless, the

opportunities are seen to be vast giving the peculiarities of the South African economy.

Practical implications – The research identifies the benefits, challenges and current state of the art regarding the

implementation of CRE and CRE through an international perspective. The findings of this paper are useful to

CREM executives in increasing their understanding and conceptualization of CRE and CREM and also enhancing

their credibility within their organizations.

Originality/value – The paper identifies the benefits and challenges of CRE and what South African corporations

stands to gain from its incorporation into their strategic management. Copyright © IJEBF, all rights reserved.

Keywords: Corporate Firms, Corporate Real Estate, Corporate Real Estate management, Property Management,

South Africa

_____________________________________________________________________________________________

mailto:[email protected]


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INTRODUCTION

Every business requires some space or property to carry out their engagements irrespective of if they are into real

estate or not. Such space has been described as corporate properties or Corporate Real Estate. There has been an age

long discussion on how to (re) structure the corporate real estate CRE functions within organisations (See: Gale and

Case 1989, Han and Liang (1995), Manning and Roulac 1996, Hartman et al 2009). The increasing magnitude of

corporate real assets instigated a situation in which the operating costs associated with maintaining these properties

became second only to payroll costs in many organizations (Bdier 2003, Brounen and Eichholtz, 2005) Regardless

of its great value Corporate Real Estate CRE is still regarded as just another necessary fixed asset, necessary

creating costs in the production of profitable products and not necessarily a value adding product (Omar and Heywood, 2010).

CRE has been described to cover the entire range of activities concerning portfolio of building and land holdings

held by an organisation (Bon, 1995). Corporate Real Estate (CRE) is the function within an enterprise that manages

its physical work, production and customer engagement environments. It refers to the management of property that

is incidentally held, owned, or leased by an organization to support its corporate mission (Kenley and Heywood,

2000). CRE has grown as a professional discipline over the past several decades (Varcoe and O‟Mara, 2011;

Sarasoja et al 2004). Kenley and Heywod (2000) stated that the primary value of CRE to the organisation is not its

investment value but rather its contribution to business operations. This is achieved by providing valuable

contributions to the business through the alignment of real estate with the business objectives (Omar and Heywod,

2010)

Seiler et al. (2001) reported the 1983 research of Zeckhauser where it was reported that the average firm‟s real estate

assets represent 25% of total assets, Singapore firms according to Liow (1999) owned as much as 40%. Amongst the

Fortune 500 companies, this figure according to Bruno (2002), has risen to about 30%-40% of total assets and 5%-10% of operating expenses; Krumm and Linneman (2001) in Brounen and Eichholtz (2005) estimated that Dutch

CRE holdings equals a sum value of approximately €220 billion. But even at this, it was observed by Zeckhauser

and Silverman (1983) in McDonagh, (2008) that most US companies treat property as an overhead cost “like

stationary and paperclips”.

In spite of this recognition, corporations continue to “under-manage” real estate assets and resources (Greenbaum,

2007). In part, this is because Corporate Real Estate Management (CREM) departments lack prominence in most

companies. As a result, this valuable part of corporate balance sheets goes largely unnoticed and undermanaged

(Hartman et al., 2009)

What this paper hopes to achieve is to evaluate extant literature on the major concepts of CRE and CREM within

organisations especially those that are not into real estate in order to see the extent of the applicability of the various

facts about the potentials and benefits of CRE and CREM to organisations. This paper brings together the results of

past research articulating the benefits of CRE and concludes by reiterating the potentials of a well-structured and

strategic CREM plan for South African organisations. It is the first of a two-part research paper. While this part

present current state of the art regarding CRE and CREM generally and South Africa particularly, the second part present results from a survey of top South African corporation and the impact of their CRE strategy on their overall

bottom line and business performance.

WHAT IS CORPORATE REAL ESTATE?

It is broadly believed that businesses, irrespective of their type of operations will need property(s) to function in one way or the other (McDonagh and Nichols, 2009). It is difficult to imagine a business that would not require one kind

of property or the other carry out its functions; in this light, Liang and Chen (2011) described Corporate Real Estate

CRE as the property used to house the business for any kind of company.


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Liow and Ingrid (2008) referred to the land and buildings owned by companies not primarily in the real estate

business as CRE. It is not particularly a new subject of study (Tay and Liow, 2006, Omar and Heywood 2010).

Vries et al (2008) defined Corporate Real Estate Management CREM as “the range of activities undertaken to

aligning corporate real estate to the needs of the core business, in order to obtain maximum added value for the business and to contribute optimally to the overall performance of the corporation”. Similarly, Kenley and Heywood

(2000) described Corporate Real Estate Management CREM as the management of property that is incidentally

held, owned, or leased by an organization to support its corporate mission. It has been noted that a major difference

is that CREM fulfills its function by managing real estate needs for non-real estate organizations (Omar and

Heywood, 2010) and it differs significantly from Facilities Management by being strategic, rather than operational

(Lallo and Asazu 2011). The principles of CREM apply with equal importance to public agencies and private sector

businesses because both use real estate as a resource to achieve their corporate and business goals.

Corporate firms own a significant amount of real estate for operation, occupation, investment and development; and so oftentimes, there arises a need to manage CRE as an integral part of business resource management in the face of

intense competition and technological advances Hwa (2003). The effectiveness of the corporate real estate function

was identified by Nourse and Roulac (1993), to rely upon the connection of real property transactions with the

overall corporate strategy aided by an explicit corporate real estate strategy. However, there is still a massive gap in

the grasping of the potentials of imbibing CRE into organization‟s corporate strategy. Many corporations still lack

sufficient insight into the impact of corporate real estate decisions on corporate performance especially when it

involves a diversified portfolio. For these reason, it remains difficult for senior management and other stakeholders

to grasp the actual contribution of corporate real estate (Scheffer et al, 2006).

Corporate Real Estate (CRE) portfolio has three dimensions to it which are: a financial asset of the corporation; a Real Estate Market asset; and lastly as an operational asset i.e. factor of production, but according to Varcoe (2000),

a significant number of corporations deal with each of these perspectives separately and they rarely seek to manage

all of them together for the greater good of the organisation. Earlier work by Krumm (1999) had identified four

perspectives of Corporate Real Estate Management CREM as General Management, Asset management, Facility management and Cost control of corporate real Estate management strategic focus. Further study by Krumm et al.

(2000) illustrated the difference between corporate real estate‟s holistic approaches as compared to the different

perspectives of the traditional, narrower approaches to property management by subdividing the management

functions of CREM into 4 areas of focus which are: the business focus, the real estate focus, the strategic focus and

the operational focus. At many organisations CRE practices have evolved from a narrow definition focusing on

managing real estate transactions and design and construction projects, to managing a wide range of functions that

support the physical workplace, financial and business strategy, and the implementation of work strategies that

integrate advances in technological mobility (Varcoe and O‟Mara (2011). Manning and Roulac (1996) suggested

that the roles of CRE executives can be categorized as shown in Table 1. At the level of the taskmaster, all the CRE

executive is doing is synonymous to getting cost-efficient facilities in place and executing tasks allocated to him.

The contributions of the CRE personnel will be felt and appreciated more as they move upwards on the functional

level towards to the role of a business strategist. Table 1 shows the different levels a CRE executive can perform his

duties and the resultant duties and achievements. As stated by the authors:

“in order for corporate real estate executives to achieve the dialogue and clout with senior management

needed to move toward the Business Strategist role, they need first to target their „„bottom line‟‟ support at the business-unit level. And even before contributing meaningfully as a Business Strategist at the business-

unit level, CRE executives must first win over business-unit managers with their transactional real estate

support (i.e., at the Taskmaster, Controller and Dealmaker levels) and truly learn the businesses of the

business units they serve”.

Table 1: (Levels of Strategic CRE. Source: Manning and Roulac 1996)

Level of CRE Function

Taskmaster Procure cost-efficient facilities

Controller Standardise space needs to minimize facility occupancy costs

Dealmaker Creative space-needs, problem-solving and negotiation re specific assets


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Intrapreneur Provide real estate services as a competitive service provider

Business Strategist Integrate workforce, workplace and technology trends into overall business strategy

Traditionally, as stated by Nourse and Roulac (1993) managers (and scholars) considered the purchase of real

property to be a purchase of an input and not the vertical integration of a firm into the real estate business (See

Krumm and Vries, 2003). One of the problems with corporate property ownership according to Edwards and

Ellison (2004) was that corporations tend to view property as a liability because the asset does not seem to be

contributing directly to their business success. Property managers see CREM as a cost center (Omar and Heywood

2010); however, with an increasing and often compulsory capital commitments of firms to corporate real estate, the historic reputation of considering CRE as an avoidable “cost of production”, is giving way due to the current

environment of increasing corporate governance, regulation and financial transparency. This is a major paradigm

shift (Oladokun 2010)

WHY STRATEGIC CRE AND CREM? Krumm (1999) was of the assertion that CRE was originally focused on meeting the continuous need for

accommodation, but according to Sarosoja et al. (2004), in recent times, the prime focus is on outsourcing services

and reducing the impact of real estate on the corporate balance sheet. According to Manning and Roulac (1996), as

society‟s changing relationships to place and space lead to new decisions concerning the function and location of

those physical environments used for working and shopping the CRE function will be challenged simultaneously

both to support existing operations and reinvent the workplaces and shopping environments of the 21st century. But

in order to understand how to confront these challenges, it is important to ascertain to a broad level of

categorization, the importance of CRE. Stoy and Kytzia (2004) saw the benefit of CREM from the cost reduction

perspective; but in defining the role of CREM in a company, Hartmann et al (2009) stated that the main objective of

CREM should be the creation of a return from real estate without distracting the focus from the firm‟s core business.

The authors further added that CREM should make a contribution toward the strength and competitiveness of a

company by ensuring that company-owned resources are used effectively. In short, increase profitability of the

company from both core and non-core operations. The aim of CREM is to enhance the performance of the client

organisation through the alignment of the corporate real estate (CRE) strategy with the organisational strategy

(McDonagh and Nichols, 2009 in Haynes 2012). Business managers tend to measure the benefit and performance of

their investment in CREM in line with the firm's vision which oftentimes is business success (Lindholm and

Nenonen, 2006). At many organisations CRE practices have evolved from a narrow definition focusing on managing real estate transactions and design and construction projects, to managing a wide range of functions that support the

physical workplace, financial and business strategy, and the implementation of work strategies that integrate

advances in technological mobility.

Earlier study by O‟Mara (1999) stated that CRE and facilities fulfill two critical roles in a company; they are the

physical support of the production process and secondly, the symbolic representation of the organisation to the

world. CREM aims to support the organizational objectives, strategies, and at the end: business success. From the

firm's owner and management perspectives, performance of the CRE as a business unit, after all, may be measured

in line with the organisation‟s mission and vision (Lindholm and Nenonen, 2006) or as stated by Vries et al (2008),

„by the organisation‟s bottom line‟.

Roulac et al (2003) identified seven contributions that superior CRE strategy can make to an enterprise‟s

competitive advantage as follows: competitive advantage of core competency, creating and retaining customers,

attracting and retaining outstanding people, contributing to effective business processes to optimize productivity,

promoting the enterprise‟s values and culture, stimulating innovation and learning, and enhancing stakeholder wealth. (Omar and Heywood, 2010) -CREM provides valuable contributions to the business by aligning real estate

with business objectives. CREM adds value by enhancing efficiency, increasing customer satisfaction and

improving productivity by incorporating real estate strategy into broader corporate planning (Lambert and Poteete,

1997; Scheffer et al., 2006).. Sharp (2008) added a direct financial dimension to it by categorizing CRE financial

opportunities as:

http://www.emeraldinsight.com/journals.htm?issn=1463-001X&volume=14&issue=4&articleid=17089787&show=html#idb19





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i. Sales of assets through sale-leasebacks, dispositions and redevelopment based upon a clear understanding

of core and non-core assets and identification of surplus property.

ii. Opportunistic restructuring of existing leases, taking advantage of market conditions and specific lease

arrangements

Weatherhead (1997) provided some of the list of data requirements vital to a true understanding of the role of real

estate within a business. These data are thought to include: the freehold value of any investment properties, annual

rents and rates bill, occupancy cost, length of leases and commitment, net income from investment properties, future

expensive maintenance, repairs or lease obligations. The research opined that when this data are used with the

normal financial records, it then becomes simpler to calculate the following: the total value of the estate, total annual

expenditure on the real estate and occupancy cost, time- scale of existing commitments (i.e. lease terms, rent

reviews, etc.), extent of future liabilities (particularly in relation to repairs), real estate costs as percentage of total

costs, value of real estate holding as percentage of total assets, return on real estate investments compared

with business overall. Table 2 presents a collation of findings from past studies on the benefits of CREM to a

business‟ overall strategic performance

CHALLENGES OF CRE AND CREM

Property as an asset class exhibits distinctive characteristics such as fixed location, heterogeneity, high unit of value

and illiquidity. It is generally accepted that due to its specialized nature, the principles of real estate becomes

difficult to simplify (Ghyoot, 2003). On the corporate front, one of the major problems of CRE has been inadequate

accounting of the real values of CRE within organisations. Benjamin et al., (1998) called this the „asset abuse

problem‟. In a thesis by Louko (2005), it was revealed that the statistics on the CRE ownership rations is vastly

divergent and often contradictory. For example, one of the earliest studies in the field of CRE was that of

Zeckhauser & Silverman in 1983. They put the figure at somewhere in the range of 25%. DiLuia et al (1991), put the total value of the real estate stock in the US in 1990 to be about US$8.777 trillion. Laposa & Charlton (2001)

came to the conclusion that in the US the value of real estate assets averages out about 25% of corporate net

worth. Corporate companies owned US$1.633 trillion out of the total $2.655 trillion commercial real estate in the

US (see Pelison 2007) A RICS initiated survey by Bootle (2002) revealed that UK private sector commercial

property at market values represents around 34 % of the total business assets.

In a 2000 research by Roulac et al. on the state of CRE decision making in Ireland, it was revealed that 56% of the

top 100 companies within both the Republic of Ireland and Northern Ireland do not have any formal corporate

mission for the CRE and only 40% are of the opinion that real estate is recognized as a key corporate asset in

organisations. These findings do not differ significantly from the 1989 study conducted by Gale and Case where 30

corporate organisations spanning over 15 different industries were studied. They found out that 93% of the

organisations surveyed treated real estate as a cost element (rather than as a resource element), only 56% included

real estate resources in their budgeting process, 48% does not have any committee in place to formulate corporate

real estate policies and the corporations were seen to have no consistent pattern of managing real estate resources.

McDonagh, (2008) quoting Gilber, et al (2002) reported that corporate real estate officers and others in the

organisation often make daily decisions about facility, location, building design, space layout and lease obligations, without a plan as to how those real property holdings could contribute to the company‟s productivity and

profitability”, in fact, they found that only 16% of CEO‟s in the UK view property as a strategic resource.

The figures were even grimmer in 2011. Varcoe and O‟Mara (2011) conducted a survey on the relationship between

perceived maturity and capability of CRE practices and economic/financial performance of business enterprises

targeting fortune 500 type companies mostly in the UK and USA. Although with only a 15% response rate, the

companies covered 9 different sectors, a total supported organizational head count of slightly more than 3.6 million

people, a total operational portfolio size of 221 million gross square meters (2.38 billion gross square feet) and a

total operating budget under management of US$72.6 billion. The survey found that none of the participating

companies managed corporate real estate at the business unit level, most respondents frequently report to the Chief

Financial Officer, followed by both the Chief Operating Officer and even the IT manager.


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But surprisingly, as far back as 1996, Manning and Roulac were able to refer to extant literature at the time which

identified the benefits of CRE and discussed how corporations can better integrate their real property decision

making with business unit decision making and corporate strategy. According to the study at the time, the question

was not if or not CRE had potentials of contributing to the overall company strategy, the issue was about what could be done by a company‟s „„real estate function‟‟ to apply the knowledge now available to achieve this greater impact

on a company‟s „„bottom line‟‟ (Manning and Roulac, 1996). An earlier research by Arthur Andersen (1993) in

Manning and Roulac (1996) had indicated that senior management typically believes the CRE function has

relatively little opportunity to impact shareholder wealth. This misconception has been dispelled though, but there is

still a lack of evidence to show that top managers are now imbibing the culture of incorporating CRE strategies into

the overall company strategy.

Real estate has a potential of being a dynamic parts of businesses. According to Greenbaum, (2007), even for

companies that don‟t consider themselves directly in the real estate industry, a potentially straight-forward scheme

of buying and selling real estate can be an essential part of an overall corporate strategy.

There are many references in literature pointing to the benefits of CREM; nevertheless, there are a host of reasons

why companies with sizeable property portfolio have not exploited these benefits and opportunities. Quoting various

sources, Omar and Heywood (2010) identified four (4) broad reasons why current CREM is seemingly not yielding

results. They are as follows:

Lack of interest and understanding from senior management

Under-management of real estate

Poor positioning and communication strategies

Failure to link CREM with overall strategy

The research by Krumm (1999) concluded that the key word of CREM is „customization‟. For example, there is a

need to be aware of the demands for space and other services while incorporating the critical peculiarities of the

organisation because as situations differs from corporation to corporation, so does the demands. This according to

Bon and Luck (2001) can be said about international differentiations as well.

PROPOSED INTERVENTIONS

Silen (2012) gave an interesting analogy regarding ineffective improperly aligned corporate real estate strategies. He

compared it with a car with unaligned tires. According to him, not properly placing CRE at a strategic level within a

company can lead to a damaging effect on other parts of the organisation. Some of the effects could be „unnecessary

cost‟ stemming from the ineffective use of the real estate footprint, loss of productivity, sub-optimal working

conditions, missed business opportunities or eve dissatisfied customers.

According to Miles et al. (1989),”it is now, more than ever, important for firms to view real estate as an asset that

can and should be actively manages to achieve corporate goals”. They further added that from their study, many

corporate organisations have the opportunity to increase their profitability through effective CREM. This as stated

by Bdier (2003) has being driving many American company‟s senior managers to realize the substantial impact of

real estate on their company‟s bottom line profitability. It is further added that CRE executives should be given more room to practice strategies such as occupancy cost minimization, flexibility, outsourcing and the management of

assets as a resource, not merely as cost. This would entail evaluating real estate on a regular and on-going basis.

Hwa (2003) solicited for a change from the view of “we are not into real estate” attitude of corporations while

Lindholm and Gibler (2006) showed that in recent years the corporate real estate and facilities management

industries are looking for ways to demonstrate how CREM actually adds value to organisations. To show these, the

industries are now shifting from perceiving corporate real estate as a purely tangible asset to one that may also

provide benefit as an intangible asset.


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Roulac (2000) Lindholm & Gibler. (2006) Scheffer et al (2006)

from De Jonge ‘96

Varcoe and

O’Mara (2011)

Omar and

Heywood (2010 )

Liang and Chen (2011)

Capital Value

Enhancement

Obtain current valuations of

facilities, Select suitable locations,

Manage risk associated with

properties

Acquisition &

disposal of real estate.

Redevelopment of real

estate and market analysis

Capital release

strategy

Increased

Productivity

Contributing to

effective

business

processes to

optimise productivity

Maintain facilities to accommodate

optimal operations.

Selection of location,

Innovative workplaces

Design and finish the

working environment based

on organisational structures

and operating processes

Return on

Asset

Make lease/purchase decision on a

facility by facility basis

Increase in asset value Business strategy

collaboration

Improved capital

asset liquidity

FM Process

Facilitation

devising a

corporate

facility location

strategy

Choose convenient layouts and

locations for providers, Design

facilities that improve the creation

and delivery of products. Use

workplaces more efficiently

Facility costs and

improved working

environment

Space and

interior standards,

serviced offices

Conducive

workspace,

corporate site

selection, data

storage ideas

Use working space more

efficiently

Competitive

Advantage

competitive

advantage of

core competency

Owning or leasing Create economies of scale in

acquisition

Customer

Retention

creating and

retaining

customers

Customer

satisfaction

measurement

Stakeholder‟s

Wealth

Enhancing

stakeholder

wealth.

Profitability growth and revenue

growth

Increased

shareholder value

HR Benefits Attracting and

retaining

outstanding

people

Seek locations convenient to

employees. Provide pleasant

working environment

Provide functional workplace.

Provide desired amenities. Respond quickly to real estate

requests

Retaining human

capital

Effective staff

development

Shifting from „cost

reduction

paradigm‟ to value

added paradigm‟


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Table 2: Compendium of the Advantages of Corporate Real Estate Management (Source: Review of extant Literature)

Innovation

Stimulation

Develop usability of the

workplaces, design facilities that

allow innovative processes

Workplace innovation

and

Communication

Continuous

improvement and

innovation

Enhanced

Value and

Culture

promoting the

enterprise‟s

values and

culture

Marketing

and Branding

Select locations that attract

customers. Make symbolic

statement through design and

location. Create workplaces that

support the brand. Provide

environment that supports the sale

Image Selling points

and Sales strategy

Increased Adaptability

and

sustainability

More responsive to marketplace

needs.

Choose leasing instead of owning. Negotiate short-term leases, Create

flexible workplace solutions,

favour multiple use facilities,

Select serviced offices

Organisational, Financial and

Technical flexibility

Sustainability Allowing for fast changes of layouts and other facilities,

separate organisational

functions. Design, build and

operate environmentally

friendly offices

Efficiency and Cost

Control

Minimize acquisition and financing costs, Minimize operating

expenses, Create economies of

scale in acquisitions, Conduct

routine maintenance. Balance

between outsourced and in- house

services, Act as a control

mechanism

Cost reduction and financial flexibility

in a rapidly

changing

environment

Establish RE cost control, balance between

requirements and cost,

minimise RE operation cost

Promote

Government

Relation

Utilize government incentives,

establish workplace standards

Governance and

compliance

Develop prime office

projects and affiliated

infrastructure matching

urban or municipality

planning


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Year Country Author(s) Focus of Study Sample Size Skew Conclusion

1989 USA Gale and

Case

CRE Resource

Management

30 (15

industries)

Current

practices

Unfavorable

Inconclusive due to sample space

Much of RE resources still centered in lower level

management

2000 Ireland Roulac

et.al

RICS Sponsored

survey

CRE Decision

Making

10 (Top 100

companies in

Ireland)

Unfavorable There is a high level of professional and practical experience

in relation to real estate that potentially has not been fully

harnessed by companies

core of CREM are not fully appreciated, acted upon or

exploited

2006 Netherlands Scheffer

et.al.

Contribution of

CRE to

corporate

strategy

14 Dutch

corporations

(8 Industries)

Current

measuring tools

are vague and

hence difficult to benchmark

CRE

contributions

Many corporations still lack sufficient insight into the impact

of corporate real estate decisions on corporate performance.

Therefore, it is difficult for senior management and other

stakeholders to grasp the actual contribution of corporate real estate

Australia Kenley and

Heywood

CREM Practices 2 focus groups

– corporate &

government

organisations (10

Participants)

New trends

emerging- new

shift towards

strategic management of

property

For corporates, the financial imperative of wealth creation

means that financial concerns predominate in strategic

considerations.

For government organisations, emphasis is on service delivery and community benefits in property procurement.

2009 USA and

Europe

Hartmann

et.al.

Value of

CREM-

Management of

RE Holdings

112- 4

industries

Top

management are

unaware of the

benefits of

CREM

There is similarity between U.S. and European CREM staff

that real estate is predominantly an operating resource

Cost/Profit discrepancy- European CREM (60%/30%) while

for the U.S (83%/17%)

However, regard-less of whether companies recognize it or

not, corporate real estate remains a valuable and underutilized

asset

2011 China Liang and

Chen

Reasons for

CREM

Implementation

by the Office-Based

Companies

China

2 case studies

supported by

questionnaires

and telephone follow up

CREM is new in

China CREM is deemed to be necessary, but it is currently thought

of as being too expensive

Actually, most of companies just want to lease or own perfect

office with good environment and convenient transportation, but they seldom consider added value created by CREM”

2011 USA and

UK

Varcoe &

O‟Mara

40 (9 sectors) CREM Level

still very low None of the participating companies managed corporate real

estate at the business unit level, most respondents frequently


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report to the Chief Financial Officer, followed by both the

Chief Operating Officer and even the IT manager

Table 3: Review of findings of past studies on CRE and CREM

Manning and Roulac (1996) provided a list of strategies that the CRE units and executives can adopt in order to maximize the contributions to their host

organisation. These are:

Build and Demonstrate Business Acumen

Become Indispensable by Broadening Services

Informate and Collaborate

Operate through Efficient, Intelligent Partnerships.

Know What Matters Most to Your Customers, Deliver It, and Prove the Value of What You‟ve Done

Build and Demonstrate Business Acumen where CRE units search for the „„strategic fit‟‟ among the corporation‟s and business-unit‟s challenges in the competitive business environment, and tailoring the CRE unit‟s planned real estate solutions to support those challenges. They advocated for CRE executives to

also become Indispensable by Broadening Services by first standardizing CRE services where needed for transactional support and corporate reporting purposes

while also customizing CRE services to meet the strategic changing needs of both the business units and whole company. There is also a need to information and

Collaborate as well as operation through efficient and intelligent partnerships is encouraged as these enhance customization of bespoke services. Lastly, it is

advised that CRE executives know what matters to their clients and deliver it. In today‟s competitive environment, CRE executives must understand, prioritize,

and manage the needs of their customers and then demonstrate the value they achieve in ways that gain them corporate-wide recognition.‟‟

CURRENT LEVEL OF CREM IN SOUTH AFRICA

Although there are regular reports on real estate dealings and developments in South Africa, academic literature is sparse. While periodical reports by Jones Lang

LaSalle, CB Richard Ellis (Broll in South Africa), South African Property Owners Association SAPOA, IPD (Investment Property Databank Ltd) and various

financial newsletters gives an insight and on the current situation of general real estate in South Africa, this reports do not specifically focus on corporate real

estate status within the economy. Oftentimes, corporate real estate reports are merged with commercial or office space reports. To this light, this paper having

highlighted some of the key benefits and challenges of CRE and effective CREM hopes to further research the current state of the art of CRE and CREM in

South Africa and the perception of CRE executives with the top 200 companies in Johannesburg.

Africa is said to be the second-fastest growing region in the world (SACommercialProp News2013) and according to the WorldBank (2013), the economy of

South Africa is the largest in Africa, accounting for 24% of Africa‟s GDP in terms of purchasing power parity, and is ranked as an upper-middle income

economy. But in spite of this, businesses are operating in a difficult environment beset by much economic uncertainty (Neneh & van Zyl 2013), which does not

augur well for the take up of office space.

http://en.wikipedia.org/wiki/Purchasing_power_parity


245

According to SACommercialPropnews (2013), the only certain tenants of corporate spaces are government.

Unfortunately some recent lease scandals and selective letting conditions exclude these stable leases from the

majority of the market. Investors and developers are having to work very hard to attract and retain tenants, and this

is costing them money in rent-free periods, broker fees and tenant installation deals, for these reasons, the SACommercialPropnews further asserts that South Africa hence has a shortage of quality assets for sale in the

investment market as matured funds are holding on to prime assets.

Jones Lang LaSalle (2013) sees the situation from slightly divergent perspective which is that although sales are

low, there is a high level of demand for „quality spaces‟ in the corporate market as there is currently a shortage of

prime property. According to the report, “the demand in the Johannesburg office market continues to be driven by

further consolidation of large corporates into new buildings, particularly in prime areas such as Sandton and

Rosebank. The increased commitment to non-speculative development in the past year by blue chip corporate

occupiers is further confirmation of demand for quality and efficient office facilities in prime nodes. Prime buildings

in prime nodes continue to appeal to a number of tenants as more quality buildings are added to the market. This is

further evidenced by the planned relocation by Webber Wentzel and petrochemical giant, Sasol to new buildings in

Sandton due to corporate consolidation.

Other indicative deals include, Bombela Concessions taking up 2,500m² of the new building in Midrand adjacent to

the Gautrain station, Emira Properties moving to Epsom Downs office park in Bryanston, PPC taking up 4,500m² in

the Eastgate 20 building near the Sandton CBD, Paragon Architects leasing 1,500m² in Illovo and JWT relocation”

Previous trends according to Ghyhoot (2003) in South Africa include a national agricultural cooperative is disposing

off all it grain silos under a sale and lease back arrangement. South Africa‟s national telephone provider, Telkom in

its 2004 annual report asserted that they will continue to focus on optimizing its property portfolio through the

relocation of employees from leased properties to owned properties as a mean of improving overall space utilization.

For Telkom, property management decreased 5.6% in the year ended March 31, 2004 primarily due to consolidation

of properties and general efficiencies in maintenance, cleaning and utilities usage, also payments to consultants

decreased 22.4% in the year in the same period through the adoption of some CRE measures.

Internationally, South Africa keeps attracting international investors. According to southafrica.info, corporate

outsourcing into Africa is expected to grow and outsourcing hubs such as Johannesburg, Durban and Cape Town are

predicted to benefit from the trend. Even ignoring the international potentials demands, Jones Lang LaSalle (2013b)

asserts that surprisingly, current demand for prime product is not translating into higher rentals as occupiers are

cautious of the already high costs of business. Other reasons include:

Increasing costs pressure continue to burden the South African business community and the already

indebted consumers

High operating costs are causing tenants to continually scrutinize costs.

There is increasing commitment to development projects in sought after areas

Vacancies expected to increase further in the office market due to increased office supply

Contrary to the office sector, there is limited choice for industrial units as vacancies are declining.

It must hence be emphasize that if corporations and companies are so keen to divest their real estate and leaseback

the same facilities the topic is worth exploring.

CONCLUSION

Corporate real estate and its management have tremendous potentials even if many companies do not realize it.

Irrespective of if or not a company is into real estate, strategic use of its corporate real estate assets can enhance its

profit or bottom line. This review has shown that some aspects of how CRE undertakes its scope of duties have a

demonstrable relationship to enterprise financial performance. Whether CRE causes higher performance (at least in

part), or is a consequence of it, has at this stage not been determined - but it does suggest that these relationships are

ripe for future exploration and research (Varcoe and O‟Mara 2011). While most of the ideas discussed here are not

new, the current environment affords tremendous opportunities for CRE executives to take strategic action. Be

proactive and take advantage by optimizing your portfolio for the long-term.


246

The debate has moved from „whether or not CREM enhances value‟ to „how CREM can enhance it‟. This is the

focus of the second part of this research where executives geared with property operations in the top South African

companies are surveyed firstly to know their perception of CRE and also to model how strategic CREM can be of

help to their company.

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