Directions in corporate real estate research

Citation

Watkins, C. and White, M. (2003), "Directions in corporate real estate research", Journal of Property Investment & Finance, Vol. 21 No. 1. https://doi.org/10.1108/jpif.2003.11221aaa.001

Directions in corporate real estate research

Craig Watkins and Michael WhiteCentre for Property Research, Department of Land Economy, University of Aberdeen, Kings College, Aberdeen, UK

Introduction

The emergence of a property research community and a research culture in the real estate profession has only really developed apace in the last 30 years (see Adair et al., 2000a). Property researchers have tended to draw on the related traditions of economics, law, human geography, planning, urban studies, construction and property valuation and, more recently, have begun to encompass advancements in business studies and finance.

The diverse backgrounds of property researchers and practitioners has inevitably led to a fragmented research agenda, characterised by quasi-independent specialism in areas including housing economics, housing finance, property investment and finance, property valuation and property development and the urban economy. Within some of these areas strong links have developed between academics and practitioners (e.g. property investment) and/or academics and policy makers (e.g. housing). However, interaction tends to rely on ad hoc networks of contacts.

In response to this the Property Economics and Finance Research Network (PEFRN) organised a seminar series to provide an opportunity for researchers at the member institutions to engage with other academic and practitioner researchers, researchers from related fields and end users of research. The seminar format was designed to allow a higher level of engagement and more detailed treatment of key research issues than traditional conference formats and programmes.

PEFRN is a network that brings together property researchers from the universities of Aberdeen, Glasgow, Reading and Ulster. The overall aim of the network is to promote, undertake and communicate high quality and practically relevant property research. The seminar series was sponsored by the Economic and Social Research Council (ESRC)[1]. Seminars were held at each institution and covered four themes: the operation and performance of property investment markets; issues in housing economics; directions in corporate real estate research; and property investment in urban regeneration (see Adair et al., 2000b for details).

This report reviews the key issues emerging from the fourth seminar in the series, which focused on corporate real estate (CRE) research and was hosted by the University of Aberdeen in April 2001. The seminar topic was stimulated by growing interest in the wider corporate function of property (especially in the USA). This is clearly demonstrated by articles in the professional press, the recent RICS-funded research and the level of international interest in the topic highlighted by the recent introduction of Journal of Corporate Real Estate in 1999 as a vehicle for the dissemination of relevant research.

The Corporate Real Estate Seminar was structured around five inter-linked themes namely valuation, finance, changing business practices, changing corporate strategy and changing user needs. The papers were presented by representatives of the academic and practitioner communities and their contributions were grounded in fields of finance, valuation, urban economics, and business studies. In addition, the workshop participants were drawn from local government, private surveying practice, the legal profession and the university sector.

Valuation issues

The opening session of the seminar focused on the implications of corporate real estate strategies for valuation practice. Nick French (Reading) and Georgina Wiseman (Jonathan Edwards Consulting) presented a paper entitled "The price of space: the convergence of value in use and value in exchange". The paper began by noting that, with changing business practices, an important trend amongst occupiers is the demand for greater flexibility from property. For valuers, this requirement presents a new set of problems when deploying the comparison method.

The paper develops ideas introduced in earlier discussion of the concepts of value from the perspective of both the user of the space and provider of space (see French, 2001). It is argued that economic theory generally distinguishes between two kinds of price, price of production or "value in use" (as determined by the labour theory of value) and market price or "value in exchange" (as determined within the textbook comparative static framework by the interaction between supply and demand). In effect we are dealing with both what space is "worth" to an individual and the "price" of exchanging that space on the market. In a perfect market, where all actors have access to the same information, "price" and "worth" should be the same. However, where information is not uniformly available, and where different users compete for space, it is likely that "price" and "worth" will diverge.

French and Wiseman argue that, in these circumstances, the traditional reliance of valuers on methods of comparison to determine "price" has led to an artificial divergence in the "value of use" and the "value of exchange". Now with such comparisons becoming even more difficult because of demand for flexibility and the diversity of lettings, there will need to be a return to fundamentals in the valuation process and, in particular, valuers will need to give some thought to the user's needs. The authors propose the use of an "affordability ratio" based on the relationship between total occupancy costs and revenues as a valuation tool. They argue that with this approach occupiers will now be more aware of the worth of the space they occupy. The authors conclude that this has begun to influence users' views of what they are willing to pay.

Brenna O'Roarty (Jones Lang LaSalle) introduced a number of additional related issues in her paper "Deconstructing real estate values" (not presented in this issue of the Journal). The paper began by providing a detailed overview of changes in historical work practices, and organisational structures and hierarchies, and gave an overview of the changing nature of business strategies, the influence of outsourcing and new technology on users' space requirements. Crucially the paper highlighted the changing role of buildings within business and the desire of users to inhabit "funky space" and in key growth sectors to promote creativity and idea exchange or even to contribute to staff retention or business branding. O'Roarty also emphasised the significance of flexible work practices and the implications for flexible space provision.

Against this background, the paper argued that there is an increasingly significant mismatch between occupiers' and investors' objectives. An important implication of this mismatch is the need for property investors to embrace "new markets". Indeed O'Roarty highlighted the opportunities for dynamic property companies who were prepared to move away from the traditional investment mindset. The paper used a wealth of case study evidence to illuminate a number of issues and to demonstrate the changing contribution of different property attributes and functions to value.

Implications for finance

Jared Fox (Chesterton Structured Finance Limited) examined the issues of financing for occupiers/investors who had specific requirements with respect to space and lease length. He related these not only to the concept of flexible buildings (discussed by Brenna O'Roarty), but also to new financial vehicles and the impact of the Accounting Standards Board (ASB) rules and the importance of "off-balance sheet" items.

His research (not presented in this issue of the Journal) indicated that sale and leaseback was becoming less important. New financial instruments were also highlighted including swaps and the use of off-balance sheet items. These were related to the desire on the part of investors and occupiers to enter shorter term contracts. The advantages and disadvantages of debt finance for vendors were also discussed. The regulatory changes implemented by the ASB and their impact on property financing were also highlighted.

Changing business practices

Ginny Gibson (Reading) looked at how changing working patterns and business practices affected the demand for space. She asserted that changes in the labour market and the requirements from business to make its workforce "flexible" would have implications for space requirements. Her research suggested that the demand drivers for office space were changing and that the increase in the use of information and communications technology had a direct impact on underlying business processes and thus the breadth and balance of activities which office space needs to support. The challenge therefore, for corporate real estate managers is to understand how space can best support ever-changing business processes.

Flexibility of property was grouped into three key areas, contractual with respect to lease length, break clauses, serviced offices; physical relating to configurations of space; and functional with regard to the various uses to which the space can be put. The flexibility of property is then matched to the flexible labour force where the latter displays contractual, time and locational flexibility. Gibson argues that in such an environment, corporate property and facilities managers need to understand what staff actually do inside an office and the nature of the work process in general if they are to provide appropriate workplaces.

Changing corporate strategy

Jim Berry (Ulster) presented the results of a survey of corporate real estate requirements undertaken by a University of Ulster research team comprising the presenter, Steven Roulac, Alastair Adair, Stanley McGreal, and Louise Brown. Berry began by highlighting that, in a European context, real estate is relatively underdeveloped as an asset in corporate strategy. In particular, it is argued that there is an underestimation of the effects of real estate assets on property costs and shareholder value.

The empirical part of the paper reported on the preliminary findings from a survey of the top one hundred companies (based on employment criteria) operating within Ireland. The survey was designed to identify the characteristics of the companies and their corporate real estate strategies. The initial findings show that real estate performs a largely traditional role within organisations but that there are distinctive differences between indigenous and externally parented companies. In particular, companies from the USA tend to have more clearly defined CRE strategies. This raises the question of whether it may be reasonable to expect growth of corporate real estate strategy within European firms. In this context, the authors highlight the high level of professional and practical experience relating to real estate that has not yet been fully harnessed by the firms surveyed. They also note that, although corporate real estate management mission statements have not been developed universally, many respondents recognised the role of property in meeting key business objectives through, for example, maximising the investment value of the portfolio. Conversely, however, few of the respondents were clear about the strategic importance of property as a corporate asset or the role that property might play in relation to broader corporate goals and strategies.

Changing occupier needs

In the final session, Chris Leishman and Francis Warren (Heriot-Watt) and Craig Watkins and Neil Dunse (Aberdeen) provided an urban economics perspective on the impact of changing business practices and corporate real estate strategies. This paper built on modelling work presented in earlier publications and reported on the preliminary results of an ongoing research project supported by the RICS Education Trust (see Dunse et al., 2001).

The paper sought to explore the impact of change on the rental structure of urban office markets. The paper explored the likely impacts on the market as revealed by changes in occupiers' locational and space requirements. The specific objectives of the project were to compare occupiers' trade-offs and preferences between submarkets in the Edinburgh market and to look at the way in which agents influence the process by which occupiers are matched to space in particular submarkets.

The results discussed were based on two survey instruments. The first surveyed office occupiers in two office submarkets (the city centre and the west end) and contrasted the preferences for particular locational and physical attributes. The second surveyed office agents order to compare their perception of occupiers' space requirements with those expressed by respondent occupiers.

The results suggest that agents' knowledge of occupier preferences vary across submarkets and that, in particular, they are less well informed about occupiers' preferences in non-traditional submarkets. The results suggested that the scale and significance of changing business practices and the emerging corporate real estate strategies described in earlier papers were not feeding through to provincial markets in a way that was likely to lead to radically altering patterns of demand or rental values.

Summary

Overall the ESRC/PEFRN seminar series has sought to provide a forum for the interaction between active property researchers from academia and practice (and from a variety of social science disciplines) and end users of research. As well as providing a forum for the dissemination and discussion of research results, the seminars sought to contribute to the development of a research agenda informed by user needs, and current advancements in academic research.

Specifically, this seminar was designed to capture a range of views about future directions in corporate real estate research. The papers presented provided a comprehensive review of the context in which the CRE agenda is being developed. Against the background of changing business practices, more flexible use of real estate space, changing perceptions of property functions and changing real estate strategies, the individual contributions focused on the issues of concern from valuation, development finance, business management and urban economics perspectives. The papers presented the findings of original survey and case study work. A number of emerging research issues were highlighted. These included:

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  the need to further monitor changes in business practice, changing perceptions of property and space and their implications for occupiers property requirements;

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  the need to reconsider the applicability of the comparison method of valuation in the context of diversity in lettings and diverging values in use and values in exchange;

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  the need to consider new vehicles for property development finance;

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  the need for investors to consider the influence of changes in technology and business practices on user requirements and preferences; and

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  the extent to which US corporate real estate strategies are likely to influence practice in the UK and Europe.

Note1. We would like to acknowledge the financial support of the ESRC in supporting the Property Economics and Finance Research Seminar Group under award no. R451 26 4814 98.

ReferencesAdair, A., Berry, J., Brown, L. and McGreal, S. (2000a), "Property investment in urban regeneration", report on the ESRC/PEFRN Seminar, University of Ulster, October.Adair, A., Crosby, N., Lim, L.C. and Watkins, C. (2000b), "The contribution of the cutting edge conference to real estate research", paper presented at the RICS Cutting Edge Conference, London, September.Dunse, N., Leishman, C. and Watkins, C. (2001), "Testing for the existence of office submarkets", Urban Studies.French, N. (2001), "Uncertainty in property valuation: the pricing of flexible leases", Journal of Corporate Real Estate, Vol. 3 No. 1, pp. 17-27.Gibson, V. (2001), "Flexible working needs flexible space? Towards an alternative workplace strategy", discussion paper, University of Reading, Reading.