Abstract

This article examines contribution of real estate decision to core businesses. Using theoretical
research it established that CRE can add value to the businesses through cost reduction,
enhancing competitive advantage, promoting human resource objectives and increased
flexibility. Examples of organisations that have benefitted from CRE decisions include, BT
Ltd, IBM Ltd, M&S and AAT.
.

REAL ESTATE DECISSIONS AND BUSINESS PERFORMANCE

Background
This article examines potential contribution that real estate decisions can make to the overall
success of an organisations core business. Real Estate is the basis of every living and
supports every organisation in every corner of the world. Organization uses real estate to
accommodate employees and processes. They either lease or own real properties in their
pursuit to attain their core business objectives whether profit or non- profit making. Real
estate is a resource for corporations and a factor of production. Corporate real estate is
identified as the fifth largest resource of businesses after capital, people, technology and
information (Bdeira, 2003), and that it makes up to over 25% of organisations balance sheet
assets for European corporations (Glatte, 2013).
Nevertheless it is surprising that although every organisation uses real estate and that real
estate makes over a quadrant of organisation total assets, very few organisations have
recognised the need for effectively managing real estate resources (Gibler, 2002). If they do
not effectively manage CRE how would one expect them to have CRE strategies that are
aligned with business objectives? Neither would one expect that they would quantify the
contribution made by CRE to the bottom line profit of their businesses. The question would
be on what basis they would measure it. So if you do not measure it how would you
understand it? Yet CRE support their core business objectives. So unless the contribution of
real estate is measured it is unlikely that CRE decisions could attract attention to the top
management of those organisations. The only exception being when there is a shocking event
happening to the organisation practically resulting from mismanagement of real estate
(Weatherhead,1997).
One of the reasons why CRE is in efficiently managed by some businesses is lack of CRE
representation at the top management of those businesses (Gibler, 2002). This is so because
some manager views CRE as only a shelter to provide appropriate working environment and
as cost of running businesses that ought to be minimise (Zaiton Ali, 2008; Lindholm &
Levinen, 2006). They do not recognise it as resource that business has to help them achieve
their core objectives. Eventually CRE functions in such organisation are often neglected and
considered as a sole responsibility of CRE officer (Weatherhead, 1997). Consequently in
many such organisations, CRE have their own strategies which are formulated without
consultation and participation of other business units such as Marketing, Human Resource,

Information Technology and Manufacturing (Gibler, 2002). As a result CRE decisions are
not aligned with those of other departments and the overall business strategy. It is therefore
upsetting to ponder on how business strategy is represented by corporation in absence of one
unit; CRE, even though it is necessary that it should cover all functional units of the
business including CRE. And that all functional units are supposed to contribute to its
profitability.
Contribution of CRE to Business
Corporate Real Estate refers to land and buildings owned or leased by companies not
primarily in real estate business (Liow, 2008). The management of CRE is called CREM and
has been defined by (Zaiton Ali, 2008) as the optimum use of all real estate assets utilised by
a corporation in pursuit of its primary business mission. This implies that real properties are
not only factors of production but also resources that people in business have at their disposal
to carry out their tasks. Likewise its input to businesses should be on the basis of the
proportion added or subtracted to the final product of the business by those factors or
resources. Implying that their measurement to the bottom line profit of the businesses should
be calculated on their cost effectiveness to the business on the basis of that addition or
deduction, (William, 1995).
Thus the key feature identified is that CRE decisions would be used to add value that could
be used to achieve organizations long period objectives. Although value enhancement or
value creation would be embodied in the functions that CRE would factor into an
organisation. This relation is well illustrated using Lindholms model figure 1

Figure 1: How real estate decision support strategies and business objective

According to Lindholm, (2006) & Zaiton Ali, (2008) CREM functions include devising new
strategies and blazing new pathways for efficient and productive operations consistence with
the goals and objectives of their core business. Operating activities are thus developed and
implemented as indicated in the figure 1 and include leasing, property management,
acquisition, divestiture, and developments. Hence when they are properly implemented, value
is derived to the film that eventually increases shareholders profitability.
According to Levainen, (2006) property decisions contribute to the success or failure of the
organisation in each of the following area; attracting and retaining workers, improving their
performance and satisfaction and propagating the corporate image of the organisations. This
is an extension from (Amaratuga and Baldry 2001, 2002 & Cloete, 2002) whose studies
revealed that good facilities management increase organisations ability to compete
successfully in a market that is constantly changing due to technological advancement.
Singling working conditions as one factor that most often contributes to employee
dissatisfaction at work. They established that when this variable was thought to be
unsatisfactory; employee dissatisfaction resulted, leading to less productivity at work. Thus
they argued that good FM should measure on value, adaptation, novelty, and support for
process and timelines. This is further supported by a framework developed by Lindholm et al,
(2006) shown in appendix 1. The framework demonstrates how Real Estate Strategic
decisions are used to add value to the films and enhance shareholders profitability.

The model appendix 1 indicates several CRE strategic decisions available for corporations
although the need may vary from one organisation to another depending on the business
model of organisation being studied. The first strategy is cost minimisation which is
employed for reducing occupation cost. According to Weatherhead, (1997) CRE is an
expensive factor of production second only to pay roll with cost outlay of 15-17% in most
large european companies. Higher cost reduces productivity for organisation, as a result
organisations engages on strategises that help minimise cost and maximise productivity. For
Example according to Mahlon Apgar, (1995) IBM saved $1.4 billion by linking real estate
utilization to business unit performance in a relentless attack on excess space.

IBM

productivity was declining due to fierce competition from competitors. They had been paced
behind with technological. Their framed computer was radicalised by PC and laptops
developments from competitors. Faced with the situation, IBM had to make a decision and
sooner did CRE director recognise the need to retrench his team and release all space that was
a surplus. They also resorted to hot-desking and re-designing of the building to provide what
was needed by the staff. This was possible because of IT developments- databases, servers
and groupware that have replaced the filing cabinets brimming with papers. By reason of that
IBM become productive again with a saving of 10 million in the first year for IBM UK Ltd
alone. Other subsidiaries followed later.
Other companies that saved cost due CRE decisions include AT&T that managed to exceed
its goal of a $500 million cost reduction by making senior executives directly responsible for
real estate issues and by linking decisions about facilities to business strategy. Chemical Bank
reversed long-term increases in occupancy costs through constant attention to its occupancyto-operating-income ratio. Dun & Bradstreet trimmed $51 million from annual occupancy
costs by identifying synergies between real estate and a wide range of internal technologies
and support services (Mahlon Apgar, 1995).
The second strategy appendix 1 is flexibility. New work pattern are emerging requiring CRE
units to accommodate changes in the organisations space requirements. For example
increasing online shopping and advancement in telecomication enables people to order things
from home and work from everywhere in hotels, homes and cars. This means less and less
space would be required for the organisation. So failure to project space requirement may
lead to failure of an organisation in a chaotic environment. For instance due to lack of
flexibility in 1990s, Mark and Spencer (M&S) a merchandise, had their business dwindling

(Weatherhead,1997). M&S business model was to own elite properties in prime location.
This business model tied large sum of money in real estate that could not be released to
respond to changes in markets. Because of that a decision was necessary for M&S to extract
value from its property portfolio. They had to dispose 200 of its 300 UK stores and raised
1.4 billion to its shareholders. They retained 60 to70% of their best performing properties
and securitised (a sale and lease back) of the remaining 200. They also released some of their
international properties such that they generated surplus funds to be reinvested in the business
and refund unhappy shareholders. M&S were absorbed with the size of the portfolio unlike
being efficient.
The third strategy is promoting human resource objective. CRE helps in promoting
productivity through provision of space that motivate people to be innovative and give their
best. Pleasing environment is useful for retaining and attracting world class talents. Things
are changing and people are increasingly looking for working environment which are selfcontained, wherein they would be working, interacting and socialising freely (Amaratuga and
Baldry 2001, 2002 & Cloete, 2002). As reported on p6 last paragraph, a compromise in
working condition results in demoralised staff and reduces productivity. For instance at BT
Ltd, People were fired because developers failed to recognise that looks, location and
functionality adversely affected the way people worked1. BT had ugliest building in towns
because they inherited buildings which were old, ugly and poor quality and highly in efficient
thereby providing low quality working environment and were expensive to run and maintain.
But now BT has become world leaders. They changed to design their world class buildings to
create the most efficient working environment. They included offices, call centres,
warehouses and technical engineering locations. In 1992 they decided to dramatically reduce
UK locations with the aim of improving working environment, designing space that would
increasingly create effective working environment. consequently after disposing 20 million
sq. feet of out dated space, it is now saving more than 0.5 billion pa in running cost enabling
more financial and business flexibility. At BT, flexibility of new building is now the core
model making it also adaptable for future needs.
The fourth strategy is to promote marketing strategy that emphasises the marketing of the
business products. CRE decisions that help to achieve this objective include rebranding of
1 Video case study retrieved from:
https://moodle.brookes.ac.uk/mod/resource/view.php?id=373947&redirect=1

companys building to promote a unique identity of organisations congruent to the products it

is offering and relocation to more visible environment that would have a catchy for the
customers. Example of organisation that reached its customers through this strategy is the
Association of Accounting Technician (AAT) (Corpra, 2008). AAT membership was
stagnating and thousands of potential candidate were missing out because they did not know
about the organisation. So AAT wanted to reach more people and expand the occupancy need.
But Corpora assisted them to engineer their business through disposal of their old office HQ
and relocate to a more visible location on a leasehold basis. Thus through CRE decision AAT
is now a new organisation, with new direction. It has powerful symbolism and branding,
employee morale soared and it has more money and members.
Conclusion
This paper evaluated contribution of CRE decision to core businesses. Using document
review it has established that CRE can maximise wealth of shareholders through increase in
revenue and profitability. Examples of organisation that have benefitted from CRE decisions
include, BT Ltd, IBM Ltd, M&S and AAT.

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Appendix 1: Contribution of CRE to Bussiness