Managing real estate value - not only for real estate development companies

Now, pressure from the finance department is set to escalate further with the introduction of International Financial Reporting Standards (IFRS). Rene Voogt, Director Oracle Asset Management solutions, Oracle Europe, Middle East and Africa, reviews the options for CRE managers seeking to improve the relationship with Finance and turn real estate from a cost into a profit centre.

The economic rollercoaster of the past five years has nowhere been more keenly felt than in the world of commercial and corporate real estate. From the massive expansions of the "dotcom boom" years, to the rapid downsizing, M&A and consolidation activity that followed in its wake, swings in economic health have been so sudden and brutal that real estate managers - used to dealing with long-term plans and contracts - have found it extremely difficult to predict and adapt to the changing environment.

The net result is that enterprises around the world have lost billions of dollars in property-related costs, generally incurred through falling property values; under-occupancy arising from downsizing or failure to grow as planned; and inefficient negotiation, management and monitoring of property-related contracts.

Real estate managers have long been feeling the heat from CFOs keen to drive out unnecessary costs and improve enterprise spend management, but to make matters worse, the CFO now has an additional reason to breathe down the real estate manager's neck - the imminent introduction of International Financial Reporting Standards (IFRS).

Introduced in the wake of corporate governance scandals and bankruptcies on both sides of the Atlantic, IFRS will become mandatory for all listed companies in the European Union from the end of 2005. The aim is to increase the accuracy and transparency of financial reporting so that shareholders, prospective investors and other stakeholders may more easily assess the value of public companies.

The way that real estate costs, assets, revenues, forecasts and liabilities must be reported will change significantly under the new accounting regulations, and it is highly likely that real estate managers will be asked to provide their finance departments with far more detail on these areas - and provide it more often - than was previously the case.

So for real estate managers in many countries, the introduction of IFRS means they will need to get a better view of every financial aspect of the company's property portfolio - from tracking the market value of each asset to improved management of leasing contracts, maintenance contracts, space utilisation and outsourcing, insurance costs, risks and liabilities and everything in between.

In many companies, while all of these tasks are done, they are often conducted in isolation from each other, using a mish-mash of spreadsheets, paper contracts and niche software applications that cannot "talk to" each other and therefore cannot provide the whole picture.

The key is centralisation - centralising both the data pertaining to the property portfolio, and the software systems used to track and manage it. Implementing a single, comprehensive property management system on a single database can bring significant benefits, not just in the ability to track and forecast property finances, but also in the ability to optimise the property portfolio for lowest cost and maximum profitability.

"Relying on paper-based, manually-driven processes and disparate sources of information was making it difficult to sustain business expansion cost-effectively," confirms Fadi Atallah, chief financial officer at Al-Ghurair Group, which manages Dubai's prestigious BurJuman and Al Reef shopping malls among other commercial and residential properties.

The Group has now implemented Oracle Financials and Oracle Property Manager to streamline accounting, forecasting and lease management activities relating to its property portfolio.

"We now have transparency of costs and commitments group-wide, and can assess our working capital requirements on a weekly, monthly or yearly basis," says Atallah. "Monthly close times are down from 45 days to six in some business units, and we can complete cash forecasts in minutes - a process that used to take four working days."

Implementing one single system for property management and financial accounting has also enabled Al Ghurair Group to optimise its lease revenues through automated contract management. "The workflow built into Oracle Property Manager also generates substantial savings in property management by ensuring that leases on our hundreds of retail outlets are renewed on time," says Atallah.

Users of Oracle Property Manager often also choose to implement the integrated Oracle Enterprise Asset Management module, which can automate, track and report on all areas of facilities management across a large and geographically dispersed portfolio of property.

Al Ghurair Group is just one company that is using Oracle Enterprise Asset Management in tandem with Oracle Financials and Oracle Property Manager, to better manage the routine and ad hoc maintenance for the upkeep of its buildings, plants and manufacturing operations.

Al Ghurair's experience touches on an area that is of significant interest to CFOs and real estate managers alike - how to achieve the optimum balance between real estate costs and real estate revenues.

For some companies, the idea of generating revenue through the corporate property portfolio may be an alien one, with property being treated simply as a cost. Yet if properly managed, revenues can be recognised through the timely disposal of property that has increased in value or through profitably subletting unused or under-utilised space.

A comprehensive property management system can help identify the ideal times to consolidate or dispose of property by tracking the value of property assets and those located close to it. On the sub-letting side, the GIS elements of modern property management systems can help optimise the occupancy of existing space and identify areas that can be effectively sublet.

Automated lease management features, meanwhile, can help create and manage sub-leases and ensure that rent is collected and renewals conducted on a timely basis - thus reducing administrative overhead, optimising cash flow and ensuring that space does not remain vacant and a drain on finances.

With the implementation of a centralised property management system, real estate managers will not only be able to provide the improved financial data required for compliance with IFRS, but will also be able to gain greater control of the myriad costs and contractual agreements involved with managing a corporate property portfolio.

The result is lower costs, better opportunities for revenue generation, and the ability to manage corporate property strategically - resulting in greater recognition and appreciation of the property management function not only by the CFO but also at Board and shareholder level.