CRE portfolio management fundamentals #1 property is not a sunk cost by ProQuest

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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
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                                                                                                   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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