Indian realty industry to almost double to $140B by FY17

BY  Pooja Sarkar, VCCircle

The industry, which had been growing at around 8 per cent annually during 2009-11, saws a 6.5 per cent deceleration in 2012-13.

The Indian real estate industry is expected to grow to approximately $140 billion by FY17, said a research report on real estate released by advisory firm Ernst $ Young and industry body FICCI. The report said, according to industry estimates, the size of the Indian real estate market was close to $78.5 billion in FY13.

Niranjan Hiranandani, chairman of FICCI’s real estate committee and managing director, Hiranandani Constructions Pvt. Ltd, said, “Mumbai urgently needs change of infrastructure with the support of government and also reforms in taxation, with 34 per cent of cost of an affordable house going out as taxes.”

The realty industry, which had been growing at around 8 per cent during 2009-11, saw a 6.5 per cent deceleration in 2012-13 primarily due to the sluggish domestic growth, rising input costs and negative global economic sentiments.

The sector’s major growth driver has been the pumping of capital through foreign direct investment (FDI) route. Between April 2011and July 2013, the sector attracted FDI of close to Rs 100,000 crore. The report, however, said the volume of FDI into the sector has been declining.

Even for private equity funding, the sector saw its peak in 2007 when $6.8 billion came in. In 2012, the industry attracted $1.7 billion from limited partners in realty projects across the country, as per the report.

For the first half of the current calendar year, the realty industry has seen investment of close to $1.4 billion and industry experts indicate that this year would be one of the better years compared to last four years.

With negligible sales and developers’ reluctance to bring down prices of properties, even banks’ credit exposure to the real estate and housing sector declined from 10 per cent as a percentage of gross bank credit in FY10 to 7.9 per cent in FY13. While bank construction finance continues to be the cheapest source of funding, another instrument which has caught attention of developers is raising money through non-convertible debentures (NCDs). Reflecting this trend, NCDs worth $4.2 billion were issued in 2012 compared with $3.8 billion in 2011.

The realty industry recently witnessed a few big-ticked buyout transactions in commercial office space by private equity funds. Over the last three years, it has attracted investment of $1.14 billion in commercial office space portfolio development.

(Edited by Joby Puthuparampil Johnson)

Corporate Real Estate: Another Area of Real Estate

The article 'Corporate Real Estate: Another Areas of Real Estate' is written by Zaiton Ali, Department of Accounting and Finance, Universiti Putra Malaysia. The article is structured as follows:

Part-I: 

• Introduction 
• Definition

Part-II:

• The differences between CRE and Property Management

Part-III:

• The differences between CRE and Facilities Management

Part-1

Introduction:

The term corporate real estate (CRE) is often confused with other aspects of the real estate areas especially the property management and facilities management (FM). This article intends to introduce CRE and its differences in comparison to property management and FM.

Definitions:

Corporate real estate refers to the use of real estate, as part of business operations and associated activities (Brueggeman and Fisher, 2001). CRE applies to properties that are either owned or leased by firms to achieve corporate objectives (Brown et al, 1993). The management of CRE is known as corporate real estate management (CREM) and was defined by Brown et al (1993) as “the optimum use of all real estate assets utilised by a corporation in pursuit of its primary business mission”. CREM contributions to the firm are translated through various activities including property acquisition and development, property management, financial analysis and miscellaneous activities such as leasing, development packaging, and brokerage (Gale and Case, 1989). It is apparent that the management of CRE involves broader aspects of real estate management ranging from routine day-to-day property management to higher-level activities of long-term CRE strategic planning and asset management.

The Differences between CRE and Property Management:

Property management involves the execution of the day-to-day tasks in order to enable the real estate assets to function properly. These tasks include three broad property management areas, namely; administrative, marketing and physical management. The administrative management involves rental collections, record keeping and reporting, while the marketing management comprises the marketing strategy, tenant selection and rental schedules. Physical management is concerned with maintenance and rehabilitation or renovation of the real estate assets (Brown et al, 1993).

Property management focuses more on building maintenance, and concentrates on fulfilling customers’ needs and satisfactions. Baldwin (1994) defines property management as, “the total care of the building during the operation stage; the extent of management service will vary according to the building’s use, quality, size, location and age, the ownership profile, and the capability and strategy of the property management company itself”. This definition implies that the property must be in its “operation stage”, meaning that the property is used by the organisation to undertake its main functions such as office accommodation to house the management and administrative staff (Gibson, 1994). The extent of management service depends on various factors, as mentioned in the definition. For instance, a high quality building would require higher management and maintenance standards (Baldwin, 1994). An older building may need more attention because there is tendency for facility failures. In addition, high maintenance costs are anticipated for this type of building.

Gibson (1994) points out the different perceptions on property management by users and property managers. The property users are usually concerned with minimising costs of occupancy and obligations. This is in contrast with property managers, who perceived property management as a technical skill and challenge. The property needs to be maintained, involves a lease that needs to be reviewed, accommodation that needs to be refurbished, and a tax liability that needs to be minimised.

From the definitions of property management, it can be concluded that there are significant differences between property management and CRE as outlined in Table 1. The former involves a day-to-day property maintenance and management, which requires personnel with more technical skills. The latter comprises the strategic use of real estate to support the business operation, and requires personnel with more managerial skills.

Table 1: 

Summary of Differences between Property Management and CRE

The Differences between CRE and FM

Another real estate area that needs to be distinguished from CRE is FM. FM is concerned with coordinating the needs of people, equipment, and operational activities into physical workplace (Brown et al, 1993). The tasks related to the FM department are acquisition and disposition, physical upkeep, record keeping, and reporting tasks for corporate-owned real estate. The US Library of Congress defines FM as “the practice of co-ordinating the physical workplace with people and work of the organisation integrates the principles of business administration, architecture and the behavioural and engineering sciences”1 . Amaratunga (2000) argues that the definition is very broad and should incorporate at least three principal aspects as forwarded by Barrett (1994). The three aspects are:

1. it is a supporting management function to the core business of the organisation

2. it concentrates on the area of interface between physical workplace and people

3. it requires a multi-skill approach.

Another definition discussed by Amaratunga concerning FM is forwarded by the Centre for Facilities Management of University of Strathclyde (1992), namely “ the process by which an organisation delivers and sustains a quality working environment and delivers quality support services to meet the organisation’s objectives at best cost”.

From the definitions, it is argued that the FM function is to support the core business of the organisation, which is similar to the function of CRE. However, the scope of CRE is wider as it involves the strategic aspect of real estate in the organisation. FM forms part of the CRE activities and it is operative in nature. The facilities department is perceived to be reactive and receives orders from CRE officers.

These definitions also distinguish the aspects of FM from property management. FM focuses on the provision of the quality working environment through various responsibilities such as facilities design, energy conservation and environmental control. Though both fields are technical in nature, FM tends to incorporate various skills such as specialists on operational management, industrial engineering, architecture and construction (Brown et al, 1993). Property management is concerned with the satisfaction of the tenants, while FM emphasises the provision of a working environment that satisfies the staff and workers in the organisation.

Zeckhauser and Silverman (1983) differentiate property management from FM by pointing to the distinction that property managers tend to consider business and real estate costs separately in order to protect business activity while reducing real estate costs. The facilities manager does not distinguish between buildings and the activities that go on in them. In fact, the FM role is to provide its services according to the business operation. For instance, when a business intends to expand its manufacturing operation, the facilities manager will consider the plan to accommodate this activity including site selection, location analysis, factories design for processing and assembling activities, space requirement and others. The differences between FM and CRE are summarised in Table 2.

Table 2:

Summary of Differences between FM and CRE

Conclusion

From the review of literature, it can be concluded that CRE role is a wider real estate area and is concerned with the strategic role of real estate management within an organisation. Both property management and FM are part of the operations under CREM. An attempt to classify the activities of each discipline is shown in Figure 1 and some activities are seen to overlap between property management and FM especially on the aspects of building maintenance and record keeping or real estate inventory of a business organisation. The responsibilities of the CRE executives are to strategise the CREM function and co-ordinate the two departments for the real estate operation, in order to support the overall business operation.

Legend:

A: CRE activities: Strategic real estate management inclusive of FM, property management, and financial analysis.

B: FM activities: acquisition and disposition, and facilities provision

C: Building maintenance and record keeping

D: Property management activities: administration and marketing

References

Amaratunga, D. (2000) “Assessment of FM Performance”, Property Management, 18(4), pp258-266.

Baldwin, G. (1994) “Property Management In Hong Kong: An Overview”, Property Management, 12(4), pp18-23.

Brueggeman, W. and J. Fisher, (2001) Real Estate Finance and Investments, McGraw Hill, USA

Brown, R. Arnold, A. Rabianski, J. Carn, N. Lapides, P. Bianchard, S. and Rondeau, E. (1993) Managing Corporate Real Estate, John Wiley and Sons, Inc., USA.

Gale, J. and F. Case, (1989) “A Study of Corporate Real Estate Resource Management”, Journal of Real Estate Research, 4(3), pp 23-34.

Gibson, V.A (1994) “Strategic Property Management: How Can Local Authorities Develop a Property Strategy?”, Property Management, 12(3), pp 9-14.

Zaiton Ali (2006) Corporate Real Estate Strategy and the Implications on Financial performance of Companies in the UK and Malaysia, Unpublished PhD thesis, Faculty of Engineering, University of Ulster, UK

Zeckhauser, S. and R. Silverman, (1983) “Rediscovering Your Company’s Real Estate”, Harvard Business Review, pp 111-117.

Components of Corporate Real Estate Management

Components of Corporate Real Estate Management

1. Systematical Portfolio management

Structure of Portfolio (divided into operating/expendable)

·   Land data

·   Tenant/renting data

·   Valuation

·   Recording of Contaminated site

Portfolio analysis

·   Structuring

·   Comparing

·   Execution strategy

Exploitation concept

·   Selling/buying

·   Renting/leasing

·   Rental right

·   Lending

Developing

2. Project development

Feasibility-Study

·   Market/location analysis

·   Utilization concept

·   Capital budgeting

Development concept

·   Exploitation concept

·   Financing model

·   Marketing concept

Marketing

·   Investors

·   Tenants/buyers

3. Exploitation Management

Division into short-term, medium-term and long term exploitable land

·   Return potential

·   saving potential

Marketing concept

·   Object processing

·   Actions / Events

·   Public Relation

Financing concept

4. Facility-Management

Technical concept/Building technology

·   Supply & disposal

·   Recycling

Infrastructural concept

·   Land & area Planning

·   Cost recording

·   Services

Commercial concept

·   Controlling

·   Object accountancy

·   Financing

Corporate Real Estate Management

The Components of Corporate Real Estate Management

Oliver Breitenstein, Alexander May, Friedrich Eschenbaum*

The part of real estate assets of companies is in many cases more than 50 % of the total assets depending on the valuation approach and the related specific real estate costs represent the second largest cost factor after the personnel expenses with 5 to 10 % of the total turnover.

This fundamental asset and cost efficiency of corporate real estates has been underestimated up to now and requires strong cost awareness has been enforced in business enterprises as well as in the public sector.  Production and administration has been optimized. Organizational methods, e. g. Lean-Management, Just-In-Time, manufacturing segmentation a.s.o. have been a reorganization of the pure functional preserving administration of corporate buildings. In the last years a established in the market. Nevertheless, the real estate sector is treated quite badly by lots of people. Due to more and more difficult cyclical influences and an increasing cost-push it is the time to optimize this pool of costs.

The term Corporate Real Estate originated in the USA should provide remedy and optimization in this matter by using new strategies. In   the meantime, some companies have introduced this professional real estate management. Approaches for the exploitation of unused expendable land and for otherwise utilization of redundant building areas have been found. In many cases inventory analysis show that more than 20 % of corporate real estate are not necessary and thus, can be exploited. By professional Corporate Real Estate Management important funds can be released in order to finance the restructuring process of the German economy with the necessary capital needs. Land and real estate are developing as a new resource for the companies’ strategy.

Real estate - also known as fifth resource of a company - after work, capital, technology and information will be involved in the company’s policy with the philosophy CRE as a strategic management technique.

Basic considerations are the representation and development of increase in value potential for not operating areas and reversed, a exploitation of cost reduction potentials for operating areas and objectes.

The objective of CRE is the making of a return from real estate without changing the head branch of a business. Furthermore, the Corporate Real Estate Management is able to make a contribution for the securing and strengthening of the competitiveness of a company - in principle, real estate offers lots of possibilities.

Strategies and methods of CRE should make a contribution that company objectives will be supported and finally reached better. Company-owned resources will be used more intensively, costs will be reduced and synergy potentials will be shown.

CRE means the bringing in of specific real estate knowledge in the field of corporate real estate (according to fig. 1).

The objective is an increasing profitability of the company.

The substantial tasks of CRE can be divided into four groups:

Wording of real estate-related objectives and strategies for setting up the developing direction of the real estate dimension of a company and adaptation to changing environmental conditions.

Optimal utilization and allocation of real estate-related resources and capacities from the real estate field (consideration of internal and external user requirements).

Fig. 1

The competent decision makers for the real estate management control the operative real estate activities which are rendered normally decentralized and primarily under utilization of external service companies.

To bring about an optimal coordination between real estate strategies and general competition strategies of a company or its business segments with a view to an improvement of the efficiency and thus, of the competitiveness of the total system.

Areas of responsibility in the Corporate Real Estate:

At the beginning of the realization of the CRE in an industrial society the most large-scale but most important step has to be fulfilled in the form of an inventory in which all objects, areas and buildings have to be recorded systematically and herewith, a valuation of the stock has to be executed according to the market criterions (e.g. comparable rents) and use (e.g. production hall).

When all objects are recorded the portfolio has to be separated systematically into operating and not operating (expendable) areas and buildings.

Expendable areas and buildings will be allocated to the sale (direct exploitation) or to the project development (classification in corresponding exploitation models) on conditions of an exploitation management. For operating areas and building plants an internal rent will be introduced. Here, it is important that the incidental expenses will be accounted for user-specific (possibly without allinclusive prices). In case of internal rents it has to be paid attention to the fact that these rents have to be levied analogically to comparable market conditions and have to be adjusted to comparable rents of the regions in corresponding intervals.

Later on an optimization of the used portfolio will be executed. By project development (PE) the expendable areas should be allocated to exploitation according to corresponding version models. The objective of this is to run the different stages of the increase in value in the added value chain in order to generate a maximum return.

By a correspondingly organized Facility Management (FM) a cost optimization should be executed for all operating objects with the objective of a cost reduction.

The number of enterprises which run an active real estate management is slowly but steadily increasing. We have to mention here IBM, American Express, BASF, Deutsche Bank AG a.s.o..

The “Union Pacific Railroad Company” let valued 22 000 miles of land alongside the railroad. The result of this examination has been unused parts of land with an amount of about 250 to 300 million Dollars with which the revenue of a company could increase by 15 to 20 %.

Annually “the Mellon Bank” raised 150-160 million Dollars as expenses for office use. Advisors have valued more than 30 locations in the Northeast of America new and have obtained cost reductions of about 20 % by sale, change of utilization and external renting of almost 40.000 m².

ABB (Asea Brown Boveri), an international electronics company with 42 million m² of land and 12 million m² of useable floor space in 33 states has reduced its portfolio of useable floor space in Swiss by 40 % by using active real estate management.

*May, Alexander/Eschenbaum, Friedrich/ Breitenstein, Oliver: Projektentwicklung im CRE Management, 

Leitfaden zur Ausschöpfung von Wertsteigerungs- und Kostensenkungspotentialen im 

Flächenmanagement, Berlin, Heidelberg, New York 1998, Springer Verlag, ISBN 3-540-63489-4