The procurement and management of property requires significant investment, both in capital and on-going expenses. Portfolios can be structured and managed to provide an optimum balance between cost minimization, operational efficiency and maximizing return on the company's investment. Total cost of occupancy should be the accommodation and portfolio cost parameter. The "user pays" principle across all business units and all property costs is a great rationing tool. Property is now no longer a sunk cost, a fixed overhead cost or a free good. Business units suddenly become highly vigilant managing their cost allocations. The charge-back system needs to be simple, transparent and robust - but flexible. The whole-of-company strategic portfolio planning process needs to be linked to annual business planning cycles. The key principle of portfolio planning is ensuring that there is a regular and consistent user pays cost recovery management via the accounting system. This needs to include a capital use charge or market rental for owned assets.
I property portfolio I 15 MIN CPD VERIFIABLE ARTICLE CRE portfolio management fundamentals #1 property is not a sunk cost A s with other overhead charges, there is a belief, sometimes correct, that nothing can be done to reduce property as much as possible – after all, costs are spread across all business units evenly in the gross margin calculation. Any cost with the business unit that requisitioned the space. When space is no longer required or is likely to become only partially occupied, costs directly impacting profit and loss ac- saving initiative by one unit is shared by the vacating business unit needs to have the counts. Worse still, in many organisations, all. Any extravagance by another unit is confidence to contract the Corporate Real particularly the older traditional sectors watered down across all units and there Estate group to dispose of the space. This with many owned assets, physical property is no incentive for self-rationing the use may be by way of re-allocation to another is treated as a free good. The inclination of accommodation by the units. As a unit, disposal in the market or negotiated is to take and hold onto whatsoever is result, meaningful and effective portfolio release from the landlord. available to support individual egos for management is impossible to implement. future uncertainties. Economic rationing This is where flexibility is required. does not exist. User Pays Sometimes it may be necessary to use Management accounting charge-back some flexibility to encourage certain It does not take much business experience systems are resisted in many companies actions. To encourage a co-location by to know that property and workplace because of the cost of administration. a unit to more expensive, longer term accommodation, whether owned or This seems to be particularly relevant corporate space may mean that the true leased, has a cost, and next to the cost of to property and accommodation costs. cost of occupancy is discounted to its prior personnel, property and occupancy costs However, with some financial analysis of cost levels. From a corporate viewpoint this are most often a corporation’s largest potential saving with a rationing mind-set, strategy may release a surplus asset. operational expense item. How these costs it becomes quickly evident that it is not are calculated and what budget alloca- whether a company can afford to imple- This ‘whole-of-company’ portfolio approach tions prevail has a profound impact on the ment charge-backs, but rather whether it also enables lease expiry profiles across behaviour of business units. can afford not to. the portfolio to be maintained at an optimal 31 basis. These profiles are to be prepared Portfolio Cost Measurement The “user pays” principle across all busi- and updated regularly across the whole The procurement and management of prop- ness units and all property costs is a portfolio and not just single business units. erty requires significant investment, both in great rationing tool. Property is now no With this understanding, lease negotiation capital and on-going expenses. To remain longer a sunk cost, a fixed overhead cost strategies can be prepared for all leases on competitive, a rationing mindset is essen- or a free good. Business units suddenly a timely basis. tial. Portfolios can then be structured and become highly vigilant managing their cost managed to provide an optimum balance allocations – and keeping the real estate Portfolio Planning between cost minimisation, operational team members on their toes, challenging
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