n many companies and organisations where property is an operating asset there is little effort spent in planning a strategy. Property decisions just seem to happen – the catalyst usually being an event such as a lease expiry, merger or the arrival of a newly appointed CEO. Even the definition of property is often unclear and usually only refers to owned premises. Leases are treated as expense items that eat into the corporate profits and are seldom treated as investments in productive capacity. So, before any strategic planning it is prudent for companies to define what is meant by property in the context of the business. Ideally, the definition should encompass all real property, whether owned or leased, covering all land, buildings, facilities or built structures controlled and used. Collectively, this represents property as corporate infrastructure assets.
There is also confusion as to the meaning of strategy. In a military context –where the word originates – strategy is defined as a plan of action designed to achieve a particular goal or set of goals. Strategy is different from tactics. Tactics are concerned with the conduct of an engagement while strategy is concerned with how different engagements are linked. In other words, how a battle is fought is a matter of tactics – whether it should be fought at all is a matter of strategy. Property strategies need to be able to respond to changing organisational frameworks and business environments. Because of its nature, property is different, but still needs to deliver corporate infrastructure in tandem with changes in corporate direction, while striving to deliver stakeholder value by growth in revenue, improved service delivery, efficiencies and cost savings. It is essential to be able to respond to new business realities such as:
• Shorter time-frames
• Greater market transparency
• Cultural diversity and social needs
• Environmental issues
• Human capital challenges
• Emerging and evolving technologies
• Increased financial complexities
• Unpredictable world events.
Finding a structure
Complexities arise in structuring a strategy because property is different to other corporate infrastructure. Property cannot be “switched on and off” as the need arises. Long lead times require planning well ahead of actual planned usage.To complicate matters further, there are high capital and transaction costs associated with property, no matter whether leased or owned. And property also has conflicting attributes. It is durable, lasts a long time and needs to be maintained – but in a time/space dimension it is perfectly perishable. The available office floor not used productively this week is gone forever. Property also functions as a consumer good and an investment good, with users and investors having complementary but often competing goals. In addition, every property is different in some form, so commodity pricing is complex. Finally, there is the unique property attribute of immobility – a good property in a bad location cannot be moved. Property strategy does not happen by chance and is not the summation of a bunch of deals negotiated by “deal-junkies”. Without a strategy, the focus of the transactions is on parts, not the sum of the parts. The overall outcome after the event is often presented as the property strategy, but in reality it is the result of a series of unintended bets in the market against others who focus on property as their core business.
Aligning the strategy
With this background in mind, how do you align property strategy with business priorities and goals? Property, as part of the corporate infrastructure, sits with human resources, information technology and finance as the business platforms providing competitive advantage in the market. In any transformation cycle facilitated by property, embedded processes such as technologies, systems, networks and shared services need to be considered. Part of the property strategy is how it is to be delivered. This includes the support service and resource plan across the entire property management hierarchy covering asset and property management, design and project delivery and facilities management including operations and building services.
Property strategy looks at portfolio objectives, and how these are aligned to support business goals, and provides a total outcome view that is worth more than the sum of the parts.Clearly defined portfolio objectives set the strategy agenda aligned with business goals. The priorities might be:
- Occupancy cost minimisation
- Portfolio flexibility – in agreements and design
- Promoting the human resources focus – employing the best Talent
- Promoting the marketing message and/or the sales and selling process
- Facilitating production, operations, and service delivery.
The priorities will differ depending on the nature of the business and the competitive forces in the market. A property strategy should also provide answers to key structuring questions:
- Do we have enough space and how much will we need in the future? It should also minimise risk in avoiding surpluses or shortages by hedging against property market swings.
- Should we own or lease core portfolio requirements?
- What are cost of occupancy structures and can they be reduced? This should recognise the true cost of property by working with the total cost of occupancy over the life of the lease or expected useful life of an owned asset.
- Will we capture scale economies between locations, business units and types of space?
- How do we maximise utility and productivity, satisfying business needs as an effective ‘factor of production’?
- What is the impact of property on our financial statements and balance sheet?
As part of the strategy, the optimal portfolio structure will need to be designed to respond to industry sector cycles and volatility. Typically, a commercial portfolio may comprise 70 to 80 percent of core space in long-term leased and owned premises, with staggered lease expiry dates. This may be supplemented with flexible space of 15 to 20 percent in the form of call or put options, usually based on short-term occupation and linked to premium payments. The balance of the portfolio, being the key focus for flexibility, may be serviced office suites and project space with shared amenities across a variety of configurations and locations. The general rule is, the more flexibility, the more expensive the cost will be. The real success of a well–structured portfolio strategy is to have flexibility only at the “edges” without expensive flexibility options across the whole portfolio. Property strategy for an operating portfolio is obviously very different to the portfolio diversification strategies for investment portfolios. However such strategies are essential to delivering ongoing value to an organisation.