DFM Konference 2002: Strategisk Ejendomsledelse

Effective Portfolio Management

SAS Radisson Koldingfjord - 30. January 2002 Joachim Wrang-Widén

Corporate Finance & Real Estate expertise - EMEIA

Amsterdam/Rotterdam 23 European Offices Athens 350 professional staff Brussels Budapest Copenhagen Frankfurt / Berlin / Stuttgart Hamburg / Cologne / Munich Helsinki London / Leeds Madrid Milan Moscow Paris Prague Stockholm Warsaw Zurich © 2002 Andersen - Real Estate. All rights reserved.

Andersen Real Estate offices

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Andersen Real Estate Consulting

What: •

Andersen Real Estate Consulting delivers integrated, business-focused solutions to global & local corporate real estate occupiers Who: Recent clients include... – Bally – British Telecom – Deutsche Bahn

Why: The common themes... – Portfolio scale – Portfolio complexity

– Dresdner Kleinwort Wasserstein

– Criticality to core business

– JP Morgan Chase

– Core business shift

– Reuters

– Value risk

– Shell

– Global spread

– Siemens – Telefonica

© 2002 Andersen - Real Estate. All rights reserved.

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Agenda •

Real Estate as an Asset



Real Estate as a Service



Real Estate Management



Current trends



Questions & Answers

© 2002 Andersen - Real Estate. All rights reserved.

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Caveats



Each saving is company specific – Difficult to generalise results – Client confidentiality



Processes can be selected in general but implementation is an individual solution-dependent issue



Presentation based on: – – – –

Practical experience through working with clients Client opinions & views Andersen research Andersen & external surveys

© 2002 Andersen - Real Estate. All rights reserved.

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Real Estate as an Asset – Asset Management



Many corporates typically have c. 40 % of their balance sheet in real estate



Real estate costs are frequently the 2nd largest cost item – normally 25 % or more



Real Estate as Asset: – Regardless of freehold or leasehold, it will be on your Balance sheet ! – Changing Accounting Principles! – Critical production factor (recruitment, physical etc.) – Underpin corporate solidity (rating institutes, collateral for loans etc.)

How © 2002 Andersen - Real Estate. All rights reserved.

Why

When 6

”Property Forum” – Conference Autumn 2001



300 corporate real estate managers



Interactive questionnaire session



Main conference focus on real estate’s contribution to: – shareholder value – economic value added – corporate efficiency

© 2002 Andersen - Real Estate. All rights reserved.

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To use your handset simply point towards the screen and press the key corresponding to your choice. There is no send key. If you make a mistake press the C button and re-enter your selection.

© 2002 Andersen - Real Estate. All rights reserved.

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Are you… ?

...an occupier

70%

?

...a service provider or

22%

?

...neither

8%

© 2002 Andersen - Real Estate. All rights reserved.

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What is your corporate WACC? ?

7 to 9%,

WACC = Weighted Average Cost of Capital

10%

?

10 to 12%

15%

?

13% plus

10%

?

Don't know

65% © 2002 Andersen - Real Estate. All rights reserved.

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Do you have Shareholder Value Measures? ? 0%

? ? ?

Yes, but not applied to property 32%

7%

Yes, and applied to property 17% 14%

25%

No 25%

43%

75%

Don't know

0%

26%

36%

...an occupier ...a service provider or ...neither

© 2002 Andersen - Real Estate. All rights reserved.

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Have you carried out any reviews of your real estate tenure strategy, or portfolio wide analysis (as opposed to single units or assets) in the last 12 months?

?

Yes 60%

?

66%

No 26% 17%

? 0%

74%

35%

Don't know 5%

17%

...an occupier ...a service provider or ...neither © 2002 Andersen - Real Estate. All rights reserved.

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Rank the top 4 of the following (to the extent they are applicable to your organisation) in order of importance to your organisation, in the context of corporate real estate. (Sample answer 5413, where 5 would be the most important and 3 the least).

?

Occupational flexibility 30%

?

Risk transfer

?

Return on capital employed

14% 17% 15%

18%

? ?

34% 35%

25% 23%

Cost certainty 19%

23% 22%

Balance sheet treament 4%

8%

13%

...an occupier ...a service provider or

© 2002 Andersen - Real Estate. All rights reserved.

...neither

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Rank the top 4 of the following (to the extent they are applicable to your organisation) in order of importance to your organisation, in the context of corporate real estate. (Sample answer 5413, where 5 would be the most important and 3 the least).

?

Occupational flexibility

Occupational flexibility

?

Risk transfer

Return on capital employed

?

Return on capital employed

Cost certainty

?

Cost certainty

Balance sheet treament

?

Balance sheet treament

Risk transfer Informal study

© 2002 Andersen - Real Estate. All rights reserved.

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Has your board increased its expectations of "value delivery" from real estate in the last 12 months (whether from cost reduction, capital release, Procurement or business alignment?

?

?

Yes

Yes

92%

?

No

58%

?

No

4%

?

Don't know

4%

33%

?

Don't know 9% Informal study

© 2002 Andersen - Real Estate. All rights reserved.

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Have you considered or completed the outsourcing or divestment of your real estate services in the last 12 months?

?

Yes 50% 26% 13%

?

No 50% 70% 87%

? 0%

Don't know 4%

0%

...an occupier ...a service provider or ...neither

© 2002 Andersen - Real Estate. All rights reserved.

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Have you considered or completed the outsourcing or divestment of your real estate services in the last 12 months?

?

?

Yes

Yes

45%

?

75%

?

No

No

54%

?

Don't know

1%

25%

?

Don't know

0% Informal study - Weighted

© 2002 Andersen - Real Estate. All rights reserved.

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Using Real Estate as Business Asset

•DKK 93 billion value •DKK 178 billion annual turnover •36,160 employees •950 offices in 92 countries •annual “real estate costs”: < 7 % or “no deal!” •regional Service Providers with contracts tendered on a revolving basis •in-house real estate team: Chief Financial Officer (!) •Real estate outsourced to external Service Provider: • advises & procures services from other suppliers •manages relationships with suppliers & monitors performance •Real Estate contributes to corporate success & growth! •Real Estate used as strategic & tactical business tool © 2002 Andersen - Real Estate. All rights reserved.

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Real Estate as a Service: Corporate Requirements / Facility Management •

Contractors on clients: ”Clients are normally not very innovative.”



Clients on contractors: ”Contractors are generally not very good or can’t supply a complete service package that works 100%”

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Business Volume / Type of contracts



Germany: DKK 305 billion - DKK 3,050 billion (sic)



UK:

DKK 916 billion - DKK 1,750 billion (sic)

? ? UK market segmentation (volume number of services): •

Total Facility Management:

58 %



Bundled contracts:

31 %



Single service contracts:

11 %

© 2002 Andersen - Real Estate. All rights reserved.

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Outsourcing from a corporate occupier perspective •

Why outsource?



solution competence within corporate



process skills for procurement of outsourcing contract – structuring of contract - content, service levels, bonus & penalty clauses



monitoring skills regarding outsourcing contract – service delivery, proactivity, responsiveness, cost-benefit



offers staff career prospects otherwise not present



how do you take care of outsourced staff ?



Do we have IT infrastructure, databases & Management Information Systems that the Service Provider can use and report into ?

© 2002 Andersen - Real Estate. All rights reserved.

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Why do corporates outsource?



The link between bundling of services, particularly within IT and maintenance



Benefits in economies of scale



Greater risk transfer



Higher quality service standards & better value for money

© 2002 Andersen - Real Estate. All rights reserved.

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Market Direction



Contracts and Bundling – – – –

IT & Telecommunications bundling becoming more popular Total Facility Management contracts on the increase Long term contracts more evident, often on a national basis Corporate PFI style deals on the increase • PRIME and STEPS • British Telecom and BBC



Fees & Payment – various methods of benchmarking/market testing of current services – greater delegation of authority to contractor



Performance – introduction of staff and contract incentive schemes

© 2002 Andersen - Real Estate. All rights reserved.

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Outsourcing decision



What services to outsource: – which skills / competencies are your “critical competitive advantage” – importance of delivery quality



Structuring of contract – incentives & penalties – quality and performance and price – current staff & systems move over to new entity?



Supplier side – any competent & capable service providers in the market? – one / several contracts? ©Castle Rock Entertainment 1996

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Contract arrangements



Contracts normally > 3 years



High contract set-up costs



Required service levels normally reached 12-18 months into contract period



Short-term contracts do not provide contractor time to “bed-in” no time to cover the set-up costs

© 2002 Andersen - Real Estate. All rights reserved.

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Real Estate Management: How to measure and Add Value? •

Key Performance Indicators [KPI] are difficult to identify



Clients increasingly have a corporate real estate strategy with different options – Slots- og Ejendomsstyrelsen : – Decision Tree structure – Corporate score-card and the role of real estate to achieve this



Boundary on what you actually can measure



Appropriateness of measurability



What to achieve?



How to achieve?

© 2002 Andersen - Real Estate. All rights reserved.

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Benchmarking – Corporate Comments

Benchmarking less succesfull than initially hoped for: 1. Too many benchmarks have focused on individual services (e.g. cleaning, security) rather than management function per se 2. Multitude of various benchmarks 3. Even if you select a benchmark, how do you measure and do you have reliable, valid data? 4. How do you define an objective KPI? 5. Benchmarks should change – don’t use the same at t10 as at t0

© 2002 Andersen - Real Estate. All rights reserved.

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Benchmark Trends



External benchmarks used as initial indicator



Key Performance Indicators used for: – –

Management of suppliers Show value generation of services / real estate management to internal users



OPD (Occupier Property Databank) useful but clients now ”club together” with other occupiers (not necessarily in the same industry) to compare process, not costs.



Use multiple suppliers for same service to compare service levels and value for money



Process benchmarking: – Process innovation – Performance measurement – Contract terms

© 2002 Andersen - Real Estate. All rights reserved.

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Outsourcing model - strategic corporate real estate management •DKK 778 billion value •DKK 220 billion annual turnover •144,000 employees •4,274 banking centres in the US •offices in 38 countries, active in 190 countries •3 global regions - 1 Service Provider / region •contracts tendered on a 3-5 year period •in-house team: 4 for Europe (!) •in-house team: •selects Service Provider, procures services, manages relationships with Service Providers, monitors performance from Service Providers, inhouse team advises business units & group management on strategy • business units pre-planning future accommodation needs © 2002 Andersen - Real Estate. All rights reserved.

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Current Trends



Integrated approach to corporate real estate



Increased focus on core business



Corporate real estate as a valuable asset + service + function



Private Finance Initiative = PFI

– Redistribution of capital from real estate into core business – Total Outsourcing

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Integrated Approach – Global Airline client X Asset Strategy

Services Strategy

•Suitability

•Unseen delivery

•Availability

•Hard & soft issues

•Finance

•Planned & reactive

•Flexibility

•Best value for money

Capital Investment

Management Organisation

•Limited resources

•Efficient use of resources

•Competing needs

•Effective communication

•Measure returns

•Management of information

•Best value for money

•Management of suppliers •Meet customer’s needs

© 2002 Andersen - Real Estate. All rights reserved.

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Private Finance Initiative - PFI Structure

3 ”functions” of Real Estate

•Unitary charge with availability deductions

Asset

Service •Risk transfer & pricing of this risk Management •Increased occupier flexility real estate & risk Finance & FM

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What is Corporate PFI? The concept - Corporate PFI - has evolved from UK government initiatives driven by the need of corporates to; -

drive capital out of real estate to pursue value creating objectives

-

transfer property related risks to organisations that are geared up and incentivised to manage those risks

-

increase operating flexibility and liquidity

-

link payments to performance levels in in both the provision of premises and supporting services

© 2002 Andersen - Real Estate. All rights reserved.

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What is Corporate PFI not? Corporate PFI is not: •

a sale- & leaseback



a serviced facility concept (e.g Regus, HQ etc.)



a facilities management outsourcing (that function covers only part of the PFI structure)

•sale- & leaseback: –is one solution but fails on often required corporate need for flexibility –Normally does not offer the “profit element” for corporate

•serviced facility –normally doesn’t cope with multi-site & sector facilities © 2002 Andersen - Real Estate. All rights reserved.

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Corporate PFI - Typical Commercial overall terms OCCUPIER

SERVICE PROVIDER

Flexibility Flexibility

Funding Funding RISK

Variation Variation

Performance Performance VALUE

Termination Termination

Repair Repair

CONTRACTUAL FRAMEWORK Term

Charge

© 2002 Andersen - Real Estate. All rights reserved.

Outgoings Increases Contract specification 35

Corporate PFI - Why do it? What the occupiers say…. •

Operational flexibility – ability to reduce accommodation without financial penalty or overhead – flexibility to leave selection of hand back properties until future – ability to re-acquire in future not lost



Reduce operating costs – – – –



Service Providers have economies of scale and focus corporate PFI ‘price’ is much lower than traditional UK lease Property risk transferred in price competitive bidding environment Property upside is in part retained

Release capital for core business – future value uncertainty for investment in operational property assets – core business generates much higher return than property assets – increase shareholder value added

© 2002 Andersen - Real Estate. All rights reserved.

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Case Study – British Telecom

1990/91

Portfolio million m2

1993/94

7.8

1995/96

7.25

1998/99

2000/01

6.6

6.1

5.85

Value DKK bn

21.6

19.8

18.6

25.2

30

Costs DKK mn

170

144

132

112

105

11000

9750

9150

8250

7250

3500

2000

1250

1000

700

Sites People

© 2002 Andersen - Real Estate. All rights reserved.

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Case Study - British Telecom

Objectives

Approach



Release capital for core business investment



Achieve operational flexibility



Achieve rapid solution



Transfer property risk out of BT



Reduce Real Estate related overheads



Outsource non-core activities



Went to market with ‘total solution requirements’ - corporate PFI



Tight time-cost-quality balance for data management



Re-engineering operational businesses’ entire approach to corporate real estate



One supplier for real estate solutions

Successes & Deliverables •

Realign real estate structure to match future strategic needs of the BT Group.



New internal real estate organisation acting as an Informed Client Unit only.



Occupying businesses more focussed on their “real” cost and responsibilities.



Positive financial solution, without ‘giving away’ value or future options with estate.



Innovative and highly “tailored” solution, on a market-leading scale.

DKK 29 billion transaction (!) – advised by Andersen © 2002 Andersen - Real Estate. All rights reserved.

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Conclusion



1 [2]

Using Real Estate as Asset: – WPP with cost reductions of DKK 180 million



Real Estate as Service: – Bank of America organisation several hundred to 4 people + outsourcing – Right service at right time in right place at right price



Real Estate Management as value adding / releasing function: – British Telecom releasing DKK 29 billion for core business

Viewing Real Estate in an integrated fashion as integral part of the corporate: – Global Airline Client X releasing capital, better facilities at lower cost with higher flexibility © 2002 Andersen - Real Estate. All rights reserved.

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Conclusion

2 [2]



Shareholder value focus gaining ground



Corporates increasingly view real estate as a valuable asset + service + function



Real estate is expected to ”deliver value” to corporate = increased pressures for efficiency & effectiveness of real estate as asset + service + function



Financial markets offer more options today compared to 90’s



Innovative corporates increasingly look for ”total solutions” (e.g. PFI) that cover several areas

© 2002 Andersen - Real Estate. All rights reserved.

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© 2002 Andersen - Real Estate. All rights reserved.

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Andersen - Real Estate Denmark



Joachim Wrang-Widén



Office:

+45-35 25 27 14



Telefax:

+45-35 25 20 19



Mobile:

+45-22 20 27 14



E-mail:

[email protected]

Midtermolen 1 DK-2100 Copenhagen

© 2002 Andersen - Real Estate. All rights reserved.

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© 2002 Andersen - Real Estate. All rights reserved.

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