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Business Cycles and Corporate Shocks: Building a Robust Portfolio

Business Cycles and Corporate Shocks: Building a Robust Portfolio. Virginia Gibson LandSecuritiesTrillium Fellow Department of Real Estate and Planning The University of Reading Business School. Current Challenges. A recent survey of UK corporate real estate

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Business Cycles and Corporate Shocks: Building a Robust Portfolio

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  1. Business Cycles and Corporate Shocks:Building a Robust Portfolio Virginia Gibson LandSecuritiesTrillium Fellow Department of Real Estate and Planning The University of Reading Business School

  2. Current Challenges A recent survey of UK corporate real estate managers showed that nearly two thirds of respondents were carrying surplus floor space and in almost a quarter of cases this accounted for between 10% and 30% of their overall floor space (FraserCRE 2003).

  3. Corporate Cycle Global Repositioning Technology Downturn Broader Retrenchment New Working Practices/ Alternative Workplace Strategies Early 90s Early 2000’s Emerging E-Business Mid 80’s • New Structures Emerge – Outsourcing • BPR Reductions & Tightening of Operations Repositioning

  4. Product/Service Lifecycle 60’s 15-25 yrs 80’s 7-10 yrs Competitors Create Knockoffs Competition Grows Original Replaced By Next generation IDEA Joins Main Stream New Product or Service Concept Introduced Idea Gains Support & Acceptance

  5. Product/Service LifecycleIn A Networked Global World 2000+ 3 months- 3 yrs Original Replaced By Next generation Competitors Create Knockoffs IDEA Joins Main Stream New Product or Service Concept Introduced Idea Gains Support & Acceptance

  6. Responding to Business Change Sales? Revenue? Headcount? The Hockey Stick Challenge Time: Months/ Quarters/ Years????

  7. Responding to Business Change Sales? Revenue? Headcount? Determining the cut off Point is Critical! Time: Months/ Quarters/ Years????

  8. Adding Value or Mitigating Risk What is the role of the Corporate Real Estate Manager in a volatile market situation? Risk vs. Reward?

  9. Risk management in CRE • Awareness of risk exposure • Risks related to projects and the operation of individual properties are reasonably well understood • Balance between paying now or paying later less well understood • More strategic CRE decisions have created financial risks that could have been mitigated

  10. Strategic Business Risk An unexpected event or set of conditions that significantly reduces the ability of managers to implement their intended business strategy Sources of Risk • Asset Impairment Risk • Operations Risk • Competitive Risk (Simons, 1999)

  11. Strategic Business Risk and CRE • Asset impairment risk • Decline in value due to market macro / micro movements • Decline in value (brand) through failure to reinvest • Physical impairment -flood, fire, terrorist attacks • Operations risk • Structural failure of an key operational facility • Legionnaires disease resulting in closure • Competitive Risk • Competitors portfolio improves - location, design, layout • Changes planning regulations impede growth • Property costs increase eating into profits

  12. Strategies and Risk • Core-Periphery Portfolios • Alternative Workplace Strategies • Total Property Outsourcing

  13. 2nd Periphery Portfolio (short-term flexibility) • “Pay as you use” • Required at short notice • May be specialist space 1st Periphery Portfolio (numerical flexibility) • Short Lease / License • Some services expected • Ability to exit Core Portfolio (functional flexibility) • Freehold / Long Lease • Control all aspects • Ability to change use Core / Periphery Portfolios Source: Gibson and Lizieri (1999)

  14. Place • Central Office • Telework Offices • Home office • Satellite office • Business Centre • Guest Office • Instant Office Space • Cellular • Group Office • Open Plan • Combi office • Activity-based Use • Personal office • Shared office • Non-territorial • Formal support • Informal Support Alternative Workplace Strategies WHERE? WHAT? HOW? Towards greater efficient and effective use…..

  15. Total Property Outsourcing Corporate Real Estate Portfolio Office Retail Warehousing Facilities Management ONE CONTRACT Flexible Space Asset Management Ownership Funding Core Space

  16. Conclusions Can an organisation have a truly robust portfolio? • Getting the balance of commitments right • Leveraging internal and external space to deliver workspace solutions • Buying yourself options for the future

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