In recent weeks I’ve splurged on presents, drained my bank account and indulged in copious amounts of mulled wine and mince pies. Alas, it’s a new year and I’m back to watching the pennies and getting my fitness regime back on track! Much like me, companies are looking at their own financial health, testing the fitness of balance sheets and scrutinising costs.
Real estate is often one of the largest items on a company’s balance sheet – and that’s before the new lease accounting proposals move leases on balance sheet (read our Lease Accounting Update). It also typically accounts for between 5-10% of annual revenue. Unsurprisingly, real estate is firmly in the spotlight. Occupiers need to get to grips with the measurement of the real estate portfolio in their financial statements. So how can occupiers get in shape for 2015?
JLL has identified ‘Five Golden Rules’ that companies should follow to ensure portfolios are fully aligned with corporate financial performance objectives. Companies who proactively seek to address these issues and partner with expert advisers are likely to deliver operational and financial benefits.
RULE #1: Get ready for the new lease accounting proposals
- New lease accounting proposals will move leases on balance sheet. These proposals have the potential to completely alter a company’s real estate strategy and will impact on decisions to own versus lease. No matter what your company’s business, if you have leases, the impact of the new lease accounting proposals on your financial statements needs to be reviewed.
RULE #2: Depreciation…mark real estate to market
- Companies have discretion over how quickly or slowly they record depreciation (i.e. allocation of the cost of real estate over its useful life). An unrealistic depreciation policy can stifle the business. Companies could face significant write down on disposal of assets or risk paralysis with equity locked in redundant real estate.
RULE #3: Own versus lease? Calculate your cost of capital for real estate
- Funding a business efficiently is a core financial objective. Companies need to evaluate their own cost of capital and evaluate whether to own or lease real estate. For some cash rich companies or those with ready access to debt – the cost of ownership may be very low. But for other companies who are not in that position – the cost of ownership may be higher if there are other opportunities to invest their capital which could deliver higher rates of return.
RULE #4: Raising capital? Consider all your options
- Should you be raising capital from your real estate? Globally, occupiers of commercial real estate have raised over $240 billion of capital from the disposal of real estate since 2009 (2009 – Q3 2014). While selling the family silver to fund the business is not for everyone, the recent surge in capital values and the sheer weight of money targeting real estate means occupiers should rigorously evaluate all the options.
RULE #5: Outsource surplus real estate to the experts
- Surplus real estate is a drain on most companies – both resource and capital. Shareholder value can be created by dealing with it efficiently and effectively. The most effective solution for companies is to outsource to the experts. Internal real estate teams may not like the sound of this but with resources often insufficient to adequately serve their operational portfolio; companies barely have the time to think about their surplus real estate.
With a new leases standard expected in 2015 there will be an increased focus from Senior Management on Real Estate. My advice for occupiers is to be pro-active and get your balance sheets back in shape. Just follow the five golden rules!