Real estate-related decisions in European cities

Real estate-related decisions in European cities

by

Carsten Lausberg, Anna Wojewnik-Filipkowska and

Małgorzata Rymarzak

prepared for the 20th Annual Conference of the European Real Estate Society,

July 3-6, 2013 in Vienna

OUTLINE

Decision-making in PREM

Classification of public real estate

Case studies

Conclusions

Overview

© Lausberg/Wojewnik-Filipkowska//Rymarzak 2013, p. 2



Case studies

Conclusions

Overview

Research objectives

Objectives of this paper

- To identify problems in the decision-making processes of municipal real estate management (REM) units

- To derive possible solutions from best practice

Part of two larger research projects which aim at …

- improving decision-making in real estate management Lausberg

- improving public real estate management (PREM) Wojewnik-Filipkowska/Rymarzak

Justification

- High portion of public wealth in real estate

- Lack of professional management in PREM, compared to CREM

- Municipalities lag behind PREM on state level and national level

Need for more professional management in many municipalities




Case studies

Conclusions

Overview

Methodology

Analysis of the current literature, including studies by consulting firms

Case studies

- Accepted method of qualitative research

- Principle of triangulation

Shows the richness and complexity of human behavior by studying a subject from more than one viewpoint

Assures objectivity (“looking at a mountain from three sides”)

Data/method/time/observer/theory/space/levels triangulation

- In-depth analysis, mainly by interviews (with mayors, real estate managers, politicians, school principals, facility managers, residents, journalists…), but also by data analysis

Selected cities

- Gdansk, Rotterdam, Jena in this paper

- Several other German cities (e.g., Hannover, Friedrichshafen)

Decision-making

Decisions in PREM…- should be aimed at increasing public value- reflect personal goals as well as organizational goals- depend on the emotional and cognitive state of the decision-maker- are influenced by interest groups- …

Decision theories - Normative/economic decision theory- Organizational decision theory- Descriptive/psychological decision theory- Political decision theory

+ PREM theory and practice


Decision-makingin PREM


Case studies

Conclusions

Overview

all are relevant forPREM, no theory fully captures reality

Development and trends in PREM

First steps to professionalization of PREM in the 1990s; influenced by new public management (NPM) and CREM

At the same time public real estate became a subject for academic and other research (e.g., by ULI, RICS, consultancies, government authorities); selected works: Audit Commission (1988), Roberts/Basile (1990), Simons (1992), Gibson (1994), Byrne (1994), Moore (1997), Straßheimer (1998), Deakin (1999), Kaganova/Nayyar-Stone (2000), Kaganova/McKellar (2006), Fernholz/Morales/Fernholz (2007), Jones/White & RICS (2008), Phelps (2010), Deloitte (2011), White (2011), Kaganova (2012)

In the 2000s increasing use of private sector practices, e.g., landlord-tenant-model, centralized REM units, and sale of surplus properties

But in most European cities PREM is still restricted to providing property for the provision of public services – either by law (e.g., in Poland) or by incompetence/unwillingness




Case studies

Conclusions

Overview

Current managerial topics in municipal real estate management

Examples:

Strategy- Formulating clear goals and strategy- Incorporating environmental criteria

Portfolio- Collecting economic and financial data about the properties- Classifying the properties for various purposes

Finance & investment- Appropriate definitions of value and return- Achieving cost transparency and economical use of resources

Organization- Centralizing all real estate-related activities in one REM unit- Introducing a portfolio management system




Case studies

Conclusions

Overview

Classifying public real estate

Proper classification is a prerequisite for strategic management and thus for creating value

Currently the classification is often based on the legal and technical attributes, while ignoring the economic and financial side

Classification criteria depend on the purpose (e.g., to organize the REM unit or to identify properties suitable for a sale-and-lease-back transaction), but also on traditions and regulations

Criteria (according to Fernholz/Morales Fernholz (2007), Dent (1997), Kaganova (2012)): - structure (buildings/infrastructure/land)- usage (governmental/commercial or direct service properties/let

properties/vacant properties)- necessity (necessary/not necessary for operations or

mandatory/discretionary/surplus)- others, e.g., development potential, ownership, function, location,

property characteristics, valuation© Lausberg/Wojewnik-Filipkowska//Rymarzak 2013, p. 7



Case studies

Conclusions

Overview

Typical classifications for municipal real estate used in selected European countries


Real estate function DK D F L NL PL

Education V V V V V

V Sports V V V V V

Culture V V V V

Administration V V V V V V

Health care V V

V V V

Welfare V

V V

Others V V V V V V

Residential/housing V

V V

V

Social activities/services V V

Warehouses V

V

V

Libraries V

Nurseries V

Commercial

V

Agricultural V

Transport and communication V



Case studies

Conclusions

Overview

Selected cities




Case studies

Conclusions

Overview

Rotterdam Jena Gdansk

Foundation 1230 1230 1224Area 206 km² 114 km² 262 km²Population • City 617,347 105,463 460,517 • Metro 1,211,523 n/a 1,080,700PREM • Foundation 2006 2003 n/a • Properties 3,726 755 7,751 • Book Value € 2.2 bn € 0.3 bn € 0.3 bn • Employees 129 170 n/a

Real estate management in Gdansk- Situation -

Gdansk is the major economic, scientific, and cultural center of the Pomeranian Province and the main port of Central and Eastern Europe

Stable population, relatively low unemployment rate, many students, many small companies

Old housing stock with poor technical condition and furnishing standard; approximately 70% require some renovation and approximately 5% qualify to be demolished

Gross value of the 7,751 municipal properties (without infrastructure and vacant land): € 0.3 billion; 50% in education/sports/culture, 33% in housing

Professional REM started with the Creditworthiness Enhancement Programme (CEP) by the European Bank of Reconstruction and Development; the project started in 2002 and covered many issues of city management, e.g., financial planning and property management




Case studies

Conclusions

Overview

Real estate management in Gdansk- Real estate strategy -

The city has not yet implemented all the measures to organize real estate management in accordance with the CEP program; missing elements for example:- No central REM strategy - No classification of properties- Lack of quantitative data and IT support

The city has no information on the market value of its assets

Initiatives which were taken on the basis of the city development strategy and can indirectly improve real estate management:- "Sportive Gdansk"- "Gdansk My City"- "Gdansk—I live here"




Case studies

Conclusions

Overview

Real estate management in Gdansk- Real estate organization -

No centralized REM unit; instead, real estate is managed by different departments (mainly treasury and municipal services) and by organizational units of the city administration (e.g., educational institutions, cultural institutions, health care facilities)



Case studies

Conclusions

Overview

Real estate management in Gdansk- Formal and informal decision-making -

The mayor and the city council favor a planned development strategy

The inhabitants may influence the decision-making process by participating in public consultations (open meetings for interested residents, closed meetings for experts or representatives of stakeholder groups, counselling points, seminars, surveys)

Consultations are carried out mainly in situations of social distrust (e.g., construction of a waste incinerator) and investments that require direct involvement and support of residents (e.g., regeneration)

Recruitment of real estate experts is difficult due to wage differences between the public and the private sector

Decision-making by civil servants in a formalized, bureaucratic way; no workarounds, no short cuts; strict procedures to ensure transparency and avoid corruption

No decision support system for managing real estate




Case studies

Conclusions

Overview

Real estate management in Jena- Situation -

Located in the center of Germany with good traffic connections to the next large agglomerations Leipzig, Dresden, Frankfurt, Berlin

Economy dominated by science and technology (three world-famous companies from the optical/glass industry, many small and medium-sized businesses, several research institutes, two universities)

Growing population, relatively low unemployment rate

Population growth was not expected in the 1990s, and especially schools were neglected, resulting in a refurbishment backlog of € 100 million in schools and € 50 million in other public buildings

Impossible to raise the necessary capital—at least not by cutting costs, increasing revenues, incurring debts, or occasionally selling properties; instead, the city decided to awaken the entrepreneurial spirit and to change the traditional management structures by creating space for own decisions




Case studies

Conclusions

Overview

Real estate management in Jena- Situation -

2001: decision to merge the real estate activities from 11 departments in one entity: “Kommunale Immobilien Jena” (KIJ)

2003: KIJ commenced operations; in order to obtain the necessary funds, the city sold 94% of its shares of the municipal housing company to its wholly-owned public utility company; civil servants transfered to KIJ (later more and more real estate experts were hired)

Major changes at the beginning:- recording of all real estate holdings transparency, data basis for

decisions- transfer of the landlord function to KIJ decisions by real estate

experts, appropriate rents- introduction of a contemporary accounting regime balance sheet,

P & L, depreciation, budgeting

Today: solid economic situation of KIJ, attractive dividends for the city each year, refurbishment backlog almost gone




Case studies

Conclusions

Overview

Real estate management in Jena- Real estate strategy -

KIJ‘s mission : „Creating values for the city and for the people who live here”

Central goal: renovation and thus preservation of the building stock

KIJ views itself as “a commercially-run, value-oriented ‘one-stop service provider’ and the central contact for all residential, commercial and internal users” of the municipal properties

Furthermore KIJ offers relocation services, owns and operates the complete information and communication technology for the public buildings, and manages Jena’s debt

Most conflicts are solved by the price: responsibility of KIJ to demand a cost-coverering rent, responsibility of the city council to allocate enough income to the public entities (e.g., a school) to pay that rent

Strong consensus among the political parties on the most important tasks of KIJ; less agreement on some operational issues such as land management




Case studies

Conclusions

Overview

Real estate management in Jena- Real estate organization -

KIJ as independent REM unit with four bodies: city council (» stockholders’ meeting), supervisory committee, mayor (= formal boss of KIJ’s employees)Decision-making

in PREM


Case studies

Conclusions

Overview

Real estate management in Jena- Real estate organization -

Process of a school renovation as an example for the close interaction between KIJ and the city: Responsibility of the schools & sports building department of KIJ, but along the process the plans go back and forth between KIJ and the city, sometimes in a formal way (continuous line), sometimes in an informal way (dotted line).



Case studies

Conclusions

Overview

Real estate management in Jena- Formal and informal decision-making -

Decision-making at KIJ was described by most interviewees as relatively informal and objective

Characteristics: - High importance of oral communication relevant information is

passed more directly and allows a quicker decision compared to a typical urban administration

- Clear planning (business plan, medium-term plans with specific goals and measures)

- Clear division of labor (the city sets the general guidelines and leaves operations to KIJ) undue influence by politicians and members of the administration is being prevented

Involvement of the public indirectly—via the city council—and sometimes directly—via meetings, surveys, and juries

Informal instruments (e.g., brainstorming) and formal instruments (e.g., web-based information tool, CAFM system) are used to support the day-to-day tasks; no specific decision support system yet




Case studies

Conclusions

Overview

Some conclusions

Study shows the diversity of approaches to PREM; as of today there is no universal model

Best practice cities many years ahead of the majority

Good examples how to solve typical problems of PREM, such as classifying properties or reducing the influence of politicians on the decision-making process

PREM has numerous benefits for local governments and can produce substantial financial gains

Some areas need more research and development, for instance decision support systems for PREM




Case studies

Conclusions

Overview

Campus of Real EstateNürtingen-Geislingen University Parkstr. 473312 Geislingen, Germany

Dr Carsten LausbergProfessor of Real Estate [email protected]

University of GdanskFaculty of Management Dept. of Real Estate and Investmentul. Armii Krajowej 10181-824 Sopot, Poland

Dr Anna [email protected]

Dr Malgorzata [email protected]

Contact Information

Documents

Real estate-related decisions in European cities