Emerald Group Publishing Limited
Copyright © 1998, MCB UP Limited
Research in the late 1980s showed that in many corporate estates the full extent of property holdings is sometimes unknown. In many companies, not only was the value of the holdings unknown, but there was uncertainty over the actual extent of ownership within the portfolio. There has therefore been a move during the 1990s for companies to review their property holdings to form an asset register.
Since that date, many private and governmental bodies have established their own systems for the asset registers and, to a lesser or greater extent, have undertaken a full valuation of all their property holdings. In most cases the valuations were undertaken on a desktop basis in accordance with the regulations laid down by the Royal Institution of Chartered Surveyors (RICS) in the RICS Appraisal and Valuation Manual.
Effective property managementGood management of corporately owned property assets is of equal importance as the management of other resources within the company. A comprehensive asset register can be seen as the first step towards a rational property audit.
For the effective, efficient and economic delivery of services, it is vital that all property holdings are utilised to the best advantage. This requires that the property provider and the property user are both fully conversant with the value of the property holding and that an asset rent/charge is made accordingly.
It should be stressed that many private companies in the UK have been reviewing their property holdings in this way (Avis et al., 1989; Avis et al., 1993; Hillier Parker 1993). In the last few years a number of large operational companies in the UK have chosen to segregate the management of their property holdings from the day to day running of their core business. This has either been achieved by forming property sections within the main company structure or in some cases the hierarchy has been more clearly defined by the formation of subsidiary companies feeding into the parent company. The operational arm would then pay the property subsidiary an open market rental for each property that they occupy.
From a private sector viewpoint, the advantage of separating the property function from the core business is twofold. First, it allows the performance of each operational outlet to be measured on the same basis; a rental would now be deducted as an operational cost on both freehold and leasehold properties. Second, the investment performance of the properties themselves can now be measured. Both of these are laudable objectives, but the measurement of performance is not as straight forward as the theory might suggest. The 1993 Property Management Performance Monitoring report by Oxford Brookes University and The University of Reading (Avis et al., 1993), highlighted the lack of information available to judge (benchmark) the performance of the property asset. A property investment might be used to assess the performance of the freehold asset, but there are very few benchmarks by which the performance of the operational use can be judged. Indeed, it concluded that there were many areas of operational property performance which are not capable of measurement in quantitative terms and an objective qualitative monitoring procedure would have to be developed.
Good property management is not an end in itself. It must clearly respond to the policies and objectives of the company. The asset register must therefore be viewed as a comprehensive information source which feeds into this process.
The asset registerThe exact form of an asset register adopted by a company is not uniform and different companies will develop their own format in accordance with existing records held by that company.
However the general principle can be gleamed from the process being undertaken by the public sector in the guidance notes Asset Registers A Practical Guide have been published by the Chartered Institute of Public Finance & Accountancy (CIPFA):
Asset registers are records of all fixed assets whose value is material. Their function is to provide the information about assets needed for their financial management, operational management and servicing; and to support fixed assets as shown in the balance sheets. Asset registers thus include a wider range of information than computerised property records, and substantially more than the inventories kept primarily for assets of lower value (CIPFA, 1991).
The valuation issuesValuations for property audit should be carried out in accordance with the provisions of the RICS Red Book, unless the valuer determined a specific reason why the Red Book should not apply. Many company valuers have argued that the Red Book does not apply to them due to the Section One exception :
(c) valuations by internal valuers solely for internal use by their organisations, i.e. where no part of the Report, any information therefrom and/or the valuation figure is to be seen by or communicated to any third party.
This, in the opinion of the RICS, is a dangerous policy. All company information can come into the public domain and thus on that basis alone it will be prudent to follow the provisions of the Red Book. Similarly, with the internal division of "service provider" and "client departments", it become increasingly difficult to determine what counts as "internal use" and what is being provided to "any third party".
Bases of valuationThe one most relevant to corporate valuations are as follows:
(1) Market value.
(2) Open market value.
(3) Existing use value.
(4) Depreciated replacement cost.
Problems with the choice of valuationOne of the principal concerns when undertaking a valuation of corporate assets is the appropriate basis. In many cases, there is a clear indication of the basis to be adopted, however in others the distinction is not so precise and different valuers might adopt different bases accordingly. This problem is exacerbated when the valuation is a mass appraisal exercise restricted to desktop analysis (a logistical necessity due to the resource and time constraints placed on many companies when undertaking the initial property audit).
In such cases, the distinction between the value of the asset in use (normally carried out on a DRC basis) and the value of the asset in exchange (carried out on a MV or OMV basis) can be quite extreme (DRC normally being significantly higher than the (O)MV). While the DRC figure can be justified in valuation terms, if an asset is revalued in the register from a MV basis to DRC basis, the asset charge resulting being fixed (normally 6 per cent of Capital Value) will also change significantly. The client department will then have a much larger charged place against their use of that particular asset and unsurprisingly they will question the uplift.
Property management issuesWhile there are, and will be, continuing problems with the valuation of property which is principally specialised in nature, one of the benefits which is accruing, due to the quantification of the cost of property usage, is that property resourcing is now forming part of the business agenda. Property as a resource has become more important.
This in turn now requires company valuers to explain and advise the client departments in a more informative and detailed manner. There is a greater need to communicate the basis of the valuation to the client department.
Ultimately, as the client departments themselves become more accountable for their individual expenditure they will want greater value for money and will rationalise their property holdings accordingly.
Given the above, it can be seen that the catalyst to this property management process is the capital/rental valuation of the asset. Management decisions will be derived by perceived values and these in turn are being determined by the internal/external valuers. The valuation process has become the linchpin in the management process.
References and further reading
Audit Commission for local authorities in England and Wales (1988a), Local Authority Property A Management Handbook, HMSO, London.
Audit Commission for local authorities in England and Wales (1988b), Local Authority Property A Management Overview, HMSO, London.
Avis, M., Gibson, V. and Watts, J. (1989), Managing Operational Property Assets, University of Reading.
Avis, M., Braham, R., Crosby, N., French, N., Gane, D., Gibson, V., Temple, M. and Whitman, A. (1993), Property Management Performance Monitoring, Oxford Brookes University and the University of Reading, GTI/Oxford Brookes, Oxford.
Chartered Institute of Public Finance and Accountancy (1991), Asset Registers A Practical Guide, CIPFA, London.
Hillier Parker (1993), "Charging out 'internal (asset) rents'; internal property management accounting practices", Corporate Real Estate Research Papers, No. 1.
Royal Institution of Chartered Surveyors (1996), RICS Appraisal and Valuation Manual, RICS, Coventry.
Young, T.R. (1994), "Market valuations with no market", Journal of Property Valuation & Investment, Vol. 12 No. 3.
Nick FrenchDepartment of Land Management and Development, The University of Reading