Corporate real estate portfolios

What is the starting point?

Corporations own large offices, production facilities and retail space, but managing and optimizing this real estate portfolio is not usually part of their core competencies. Often, there is no real estate management with a strategic focus, and as a result, the portfolio of properties only receives the attention it needs in times of crisis.

Business premises are built for a specific, individual purpose and are difficult to adapt and the infrastructure and building services are often outdated. However, when business or production strategies change, this may require the expansion of commercial or industrial space or the modernization of existing facilities.

A company's real estate ties up considerable capital, but releasing this capital is complex and requires a strategic approach and extensive human resources in order to synchronize the change process of the core business with the real estate portfolio. Transforming existing space is a challenging task and can be economically demanding.

Real estate assets must be consistently geared toward performance and require continuous financial optimization. The focus is not only on effective facility management to reduce operating costs, but also on making the real estate portfolio more flexible in order to respond to different options for the provision and use of space.

What are the challenges?

1. Change process

Companies are under intense pressure to transform, and this affects not only production facilities but also most other business uses. Changing interest rates, import tariffs, and rising inflation, particularly for raw materials and energy prices, are putting pressure on the cost side. In order to reduce energy costs and building emissions, energy-efficient renovations often need to be planned and implemented.

Existing real estate portfolios are struggling to cope with this pressure to transform and they are often given low priority. It is not uncommon for a real estate strategy to be out of step with the corporate strategy. In order to steer the portfolio of properties in the right direction, it is important to draw up a comprehensive business case with a strategic roadmap.

For real estate that no longer meets future requirements, exit strategies must be developed or, if there is no marketability, consistent vacancy management must be implemented. Depending on the situation, the solution may lie in the utilization of the portfolio and the release of the capital tied up in it to support the transformation. The real estate portfolio is used to finance necessary investments and transformation costs, e.g., through a sale-leaseback transaction, a sale, or a lease to third parties.

In the case of third-party use, the question arises as to how a property that is no longer required for operational purposes can be placed on the market, what sensible conversion concepts are available, and which interest groups are considered to be potential buyers.

2. Flexibility and risks

For companies, the high pressure to transform is creating a need for flexibility on multiple levels. In this process, real estate can either become a positive catalyst for the change process or an obstacle.

Making the portfolio of properties more flexible isn't just about finding locations and planning space, for instance making sure there's room for expansion, but also about coming up with spatial concepts that can be tweaked to meet different needs so they're ready for the future uses.

The decision on whether to own or lease a premises has a significant impact on the transformability of the real estate portfolio. An adaptable holding structure for the real estate portfolio can serve as a means of reducing the risk exposure. Strategies for gaining or increasing flexibility in the portfolio should also take into account the financing and development potential of the properties.

Which factors influence the success?

It is of fundamental importance that a thorough analysis is carried out to achieve a high level of transparency in the real estate portfolio. This applies not only to space, uses, and operating costs, but also to the necessary future maintenance costs and investments for the transformation of the properties. Ideally, this information should be recorded in a real estate management system that is accessible to all parties involved and updated on an ongoing basis. Transparency creates a sound basis for decisions on the direction of the real estate strategy to keep it in line with the corporate strategy.

Transparency of data is important for the manageability of the portfolio. The real estate strategy must be able to respond in an agile way to changes in the corporate strategy. This requires consistent preparation for possible scenarios. How can unused properties be leased to third parties, sold, or transferred as part of a ground lease as quickly as possible once they are no longer used by the company?

Risk-oriented portfolio planning is essential. How can the portfolio be secured so that it remains marketable and can withstand different scenarios? The respective return and value appreciation potential of the scenarios is critically weighed against the possible risks. The risk exposure of the portfolio must be limited and continuously aligned with the company's risk profile.

How do we proceed?

1. Analysis of the existing portfolio

In a first step, we analyze the key parameters of the current real estate portfolio. The data on available space, the types of use, and vacancy rates are compiled. The terms of lease agreements and land lease agreements are analyzed on a timeline.

The sustainability and value of the properties are examined. A comparison with relevant competing properties shows how the properties are positioned in the market.

A distinction is made between properties that are essential for operations and those that could be used by a third party. The strategies of the business units are analyzed and their direct or indirect requirements for space are compiled.

2. Comparison with future requirements

Comprehensive analysis of the current situation constitutes the basis for meeting the challenges. Once the inventory has been completed, the future requirements for space are determined and possible scenarios are developed. The following questions are important as part of the analysis:

How does the future requirement for space differ from the current situation?
Are the current locations, property characteristics (property quality), and space in the own real estate portfolio suitable for the company's future requirements?
Which properties will remain essential for operations in the future?
What are the expectations in terms of profitability and value development?

Thanks to a comprehensive analysis, future developments can be based on sound data. It can be shown how the potential of the real estate portfolio can be strategically optimized.

3. Formulation of a portfolio strategy

A comprehensive strategic approach is required to map future changes to the real estate portfolio. When developing the real estate strategy, the impact of the corporate strategy on the real estate portfolio must be taken into account. The following topics, among others, are considered:

Growth scenarios for the company and their impact on requirements for space and securing locations
Impact of changes in the corporate strategy on the real estate portfolio
Flexibility of the real estate holding structure (ownership, leasing, land lease) in the event of changes in the company's operations
Review of the portfolio structure for opportunities and risk exposure
Generation of proceeds from the disposition of properties that are no longer essential for business purposes (rental, sale, sale-leaseback)
Conversion scenarios for individual properties, taking into account investment requirements

Conclusion: Selecting and evaluating strategic options is an important step but implementing them with an active and results-oriented management strategy is the decisive factor.

What are your advantages?

It can be helpful to bring in external partners who can support the transformation phase with in-depth real estate expertise and market knowledge. You benefit from the following advantages:

AREA is your sparring partner for the strategic development of the real estate portfolio.
AREA brings an external, critical perspective to the analysis.
AREA reviews existing assumptions, identifies new options for action, and limits the risk exposure.