Lesson 4 29 Nov 2017

Chapter 3

• Strategic real estate procurement options

• Buy vs Lease

• Sale-and-leaseback (SLB)

• Sale-and-manageback

• Total real estate outsourcing

• Built-to-suit (BTS)

Strategic Question:

• Should the company BUY or LEASE?

• Some considerations:

• Cultural – East vs West, control over the property, feng shui?

• Financials – capital appreciation, NPV, ROI

• Business – organisation needs, branding, naming rights, strategic location, seat of power (BJ vs SH, Hanoi vs HCMC)

Buying vs Leasing

Buying vs Leasing

Strategic Reasons

Financial Reasons

Buy vs Lease Decision Matrix

Sale-and-Leaseback (SLB)

Sale-and-Leaseback (SLB)

• Hyflux Innovation Centre, the 10-storey building at 80 Bendemeer Road

• Hyflux has sold its global headquarters to Ascendas Real Estate Investment Trust (Reit) for $170 million

• After the sale, Hyflux will remain the major tenant in the property as part of a 15-year lease-back agreement

• Hyflux said it will use the sale proceeds to acquire new technology and invest in research and development. The funds will also go towards expanding and automating the company's membrane manufacturing operations in Tuas Hub and financing infrastructure project tenders

• As the largest tenant, Hyflux will retain naming rights for the property. It will also pay rent on the vacant space in the building for three years.

• The building has an existing occupancy rate of 83.9 per cent

Sale-and-manageback

• Common arrangement in hospitality industry eg. hotels

• Operating company sells hotel property to an investor who in turns grants management contract to the operator

• More complicated than sales-and-leaseback

• Hilton Hotels completed a £400 million manageback of 16 UK hotels in 2005.

Total real estate outsourcing

• Outsourcing involves the transfer of property and the risks associated with managing & servicing that property in return for occupational flexibility and straight forward charging (Mapeley, 2009)

• Companies that deem RE is not a core business and hence make strategic decision to outsource most/ all RE functions

• Some set up subsidiaries to manage the real estate assets

Outsourcing Decision Matrix

Source: Research Gate

Outsourcing Facilities Management • Outsourcing in facilities management involves external

company taking over the operations and managing the facilities as prescribed in the contractual agreement.

• The goal is to help businesses achieve their strategic objectives, to maximize returns on investment and establish long term competitive advantages in the marketplace.

• Advantages and disadvantages of Outsourcing vs in-house facilities management.

• Selecting the appropriate strategy to maximize the facilities output in order to reduce building life-cycle costs and maximize profits.

• Setting KPIs and industry benchmarking

Built-to-suit (BTS)*

• A way of leasing property, usually for commercial purposes, in which the developer or landlord builds to a tenant's specifications.

• The landowner pays for the construction to the specifications of the tenant, and the tenant then leases the land and building from the landowner, who retains ownership.

• Build to suit is frequently used by tenants who wish to occupy a building of a certain type but do not wish to own the building.

• A creative way of real estate financing

* Not in the handouts. Supplementary materials

Built-to-suit (BTS)*

* Not in the handouts. Supplementary materials

Built-to-suit (BTS)*

* Not in the handouts. Supplementary materials

Precision manufacturer Beyonics opens new integrated Singapore headquarters Business Times WED, NOV 29, 2017 - 8:32 PM

• PRECISION manufacturer Beyonics unveiled on Wednesday its new S$27 million headquarters in Marsiling, five years after the Singapore-based group was bought out and delisted by Asian private equity fund manager ShawKwei & Partners.

• The 230,000 square feet facility replaces four separate manufacturing sites here and will house both Beyonics's manufacturing and engineering businesses.

• Chief executive Scott Smith said that the plant is similar to the ones it developed in China, Malaysia and Thailand, and offers a one-stop shop for design and manufacturing, which "reduces supply chain costs, speeds up delivery and increases productivity".

• The company plans to draw on robotics, automated guided vehicles and other forms of digitalisation in the new facility to cut cycle time by 30 per cent.

• Beyonics will also set up a new business innovation team to develop new manufacturing solutions with improved cost-efficiency and productivity.

• Economic Development Board assistant managing director Lim Kok Kiang said in a statement: "Singapore's advanced manufacturing journey builds on the existing strengths of our manufacturing industries.

• "Beyonics' investment is testament to Singapore's capabilities in high-value manufacturing and innovation."

Lesson 5 1 Dec 2017

Chapter 4

• Real estate Performance Evaluation

• Real estate Benchmarking

Performance Evaluation

• In your own words, define Performance Evaluation

PSLE, “O” and “A” Levels,

Diploma, Degree etc.

Measure by grades or take a holistic view?

• Quantitative vs Qualitative measures

• Define your OWN key performance indicators (KPI)

Real Estate Performance

• Understand what are the functions of real estate assets in the organisation:

RE as an operational asset

RE providing space for the core operational activities of business

RE as core business producing return directly

RE as a cost base

RE as a Core Business

• Cost base

• Asset base

• Trading base

RE as a Core Business

How is the asset performing compared to the market?

Evaluate RE as Cost base

• The costs will be incurred in a variety of ways:

• Negotiations with existing tenants – this can be very time consuming if the RE is multi-tenanted and are required for: • Rent reviews, lease renewals, and break clauses

• Surrenders and dilapidations

• Enforcement of insurance/repairing obligations

• Collection of rents & service charges

• Legal pursuit of defaulting tenants or guarantors

• Marketing and re-letting • http://www.scmp.com/property/hong-kong-china/article/2121806/hong-

kong-overtakes-london-worlds-most-expensive-urban

Evaluate RE as Asset base

• Data required for the assessment of performance of RE as core business include the following:

• Rental value (gross vs net)

• Management costs

• Holding costs

• Capital value and yields

• Physical characteristics & tenure

Property Tenure

Evaluate RE as Trading base

• RE treated as a commodity can be traded for something else

• Each unit of RE within the portfolio has to be evaluated in terms of:

Existing investment return

Potential return

Open market value

Potential size

Portfolio spread

Geographical spread

Returns available on alternative investment vehicles

Changing Market Conditions

It is important to be aware of the context provided by the external factors. It might be that the RE has moved from being prime to secondary due to:

• Functional obsolescence

• Old warehouse & go-downs

• Locational obsolescence

• Shifting of industry clusters

• Demographic change

• Baby boomers to ageing population

• Fashion

• Boutique hotels, shoe-box apartments

• Economic change

• Singapore economic development

JTC Flatted Factories

Print Media Hub @ Paya Lebar iPark

Review RE Strategy

• Evaluation questions that need to be asked include the following: • Is the RE being used in a way that maximizes revenue regarding

investment return? • Consolidation of operations?

• Rent out excess space?

• Re-financing?

• Are there identifiable ways of improving the performance of the RE? • Asset enhancement initiatives?

• Marketing and branding?

• Is the RE appropriate within the overall portfolio? • Divestment?

RE Benchmarking

• Real estate benchmarking is the standard of measurement used to analyze the financial characteristics of a real estate investment property.

• In the general sense, real estate benchmarking refers to the comparison of potential real estate investment properties against a predetermined framework of measurement.

• http://www.slideshare.net/JLL/bank-re-benchmarkingssjllfeb2014

RE Benchmarking

There are four stages in the benchmarking process in RE:

• Understand RE and business objectives

• Identify opportunities by comparing key RE measures against competitors

• Identify solutions by assessing critical drivers

• Implement and revise solutions consistent with changing business objectives

Criticisms of benchmarking

Even though benchmarking is considered to be effective, it has some limitations.

1. focuses too much on data and not the processes behind the data

2. benchmarking practices are retrospective as they measure company history rather than incorporating current trends and projections

3. no one outside the “best practice” companies actually knows what the “best practices” really entail

4. copying competitors’ approaches may produce inherently conservative improvements, which may inhibit innovation

5. benchmarking cannot be applied to measure qualitative performance indices such as brand strength

6. organisations need to determine what will work for them