- 20 OCT
Corporate Real Estate: Own it or Lease it?
Surveys in the first world countries have shown decreases in corporate real estate property in the sectors of telecommunications and banking of their asset registers in the past ten years which are of course the leaders in making high profit margins. This is because of the understanding that “less is more” in terms of ownership of real estate. There is no need for ownership of vast amounts of real estate which does not contribute to the makings of money.
For many corporates leasing property has proved to be a more viable remedy or in some cases owning some property such as the headquarters of a company and instead several more buildings, simply leasing property for branches or factory sites. The model for this rationale for the “own versus lease” dynamic should be to compare the value of the profits the company foresees that it will make if it leases that property with the value of the profits it foresees if the company invests in the property. The reason for this is in order to make use of as much capital for high yielding endeavors (hopefully the company’s trading) versus investing into a lower yielding endeavor (owing real estate).
Such approach is definitely more admirable than the more common approach of simply investing in real estate because the misunderstanding than that the more real estate a company the more wealthier it is. Or the other tragedy wherein a corporate invests in real estate for purposes of its trade but ill manage such an asset and must then dispose of it because the company is going bankrupt. Such divestments also only occur in weak markets which could be the very cause of the corporate’s distress which only serves to provide a lower chance of recovery for the investment. Either way, even after divestment, the proceeds must be again re – invested into the core business.
Some corporates issue a requirement for a return of investment over a specific period from the subsidiary for which the investment was made in order to ensure that the value of the investment is maximized. This also assists in alleviating periodically the burden of the locked up capital used to make the investment from the corporates books ensuring that there is a constant re injection of capital. On issuing such a requirement for each real estate holding the rate of return is also issued. The thinking behind this procedure is the avoidance of an opportunity cost to the Corporate caused by the use of a certain amount of capital.
In essence Corporate real estate management is a game of resource allocation to the benefit of the core business or whichever part of the business has the highest capital yield. Because after all the point of it all is to find ways to make the biggest profits.