Benchmarking your portfolio of leases: Why it's important, and how to do it

Posted On Tuesday, 02 September 2008 02:00 Published by eProp Commercial Property News
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Whether in good times or bad (but it makes uncommonly good sense to do it now emphasises Michael Schirnig of Alchemy Advisors), all companies need effective methods for evaluating corporate property portfolios to identify needs and opportunities and to develop strategies that improve performance

Michael SchirnigIn a stable company with steady staffing levels and few operational changes, performance can be as simple as comparing total occupancy costs from year to year: If they go up beyond inflation, that’s bad, and if they go down, that’s good.

In the world of corporate property management, there are literally hundreds of performance measures from which to choose. The application generally falls into categories according to space type.
For example, in space utilisation, retail operations are critically concerned with sales per square metre, while manufacturers focus more on units of output per square metre and percentage of capacity utilisation.
However, there are four acid-test performance measures that are most widely used in corporate real estate benchmarking and strategy development

Here are the four key measures

1. Occupancy Cost-to-Revenue: Most companies can afford a certain level of occupancy costs, just as individuals can afford certain housing bond costs. But where individuals’ affordability levels max-out around 30 percent of household income, corporations vary much more widely. For franchise restaurants, rent can't be much higher than 8-10 percent of turnover, while grocery retailers with their tight margins need to run at below 3% and biltong shops can cope with 20% or more. Office users seldom spend more than 1.5% of revenue on space, though this is changing as office rentals more regularly breach the R100/sqm mark.

2. Occupancy Cost-per-Person: People are often a common denominator of productivity because they produce the product and/or perform the services, either directly or indirectly. In a well run portfolio of branches, companies can improve efficiency by reducing the occupancy cost needed to support each person producing the product and/or service.

3. Square metres-per-Person: This benchmark measures the physical efficiency of space utilisation. Many design-focused property and financial managers are right to point out that square metres per person has little to do with the good work of their facilities and project managers. In fact, it is much more a measure of the buildings selected by operations managers and the staffing plans they implement.

4. Occupancy Cost-per-Square Metre: Occupancy cost represents the financial resource used to pay for space utilised by people in producing products and services. Many managers oversimplify the definition as being roughly the same as rent, and they measure theirs against market rates to evaluate performance, It is much broader than that; in fact, occupancy costs can be twice the rent expense once operating expenses, taxes, depreciation, interest and any other expenses carried such as media rooms, boardrooms and parking are factored in.


The information base provided by decent lease administration and related benchmarking discipline is important, but not an end in itself.
Action must follow.
A glance at lease rates, for example, may reveal that the company is paying above-market rents that date back from lease contracts signed in the early 2000s with its then-higher escalation rates. Some leases may be renegotiated, and some buildings may be sold.
The lease market may be strong enough to encourage some recouping of lost rental Rands through offering some space for sub-leasing. And a market where a company is paying high rent in several scattered locations may offer a single, contiguous / consolidated space at a more economical rate. Or the company may decide to consolidate into a city with comparatively low rents and a desirable labour pool, where space is plentiful and cheap.
To quote from that noted property advisor, the Cheshire cat of Alice in Wonderland - "If you don't know where you're going, any road will take you there" - benchmarking is a critical first step in identifying what you've got, and then picking goals (efficient and effective) to achieve the best real estate outcomes for your firm. 

Example of typical Question: We have multiple leases expiring at different times all over South Africa. How should we best manage our portfolio?
Anwer: You’ve alluded to the answer in your question, by using the word “portfolio”.  Even though you’re “only leasing” the premises, they represent a significant investment (tenant installation, furniture and most NB the staff/machinery housed inside the premises) and should be actively managed, just as an asset manager would manage a portfolio of equities on behalf of a pension fund, say.
And as companies grow, there is an increasing need to effectively manage the critical elements of all your obligations – and those that your landlord needs to perform. The financial obligation is only one of the elements. Other elements of particular interest should be the management of critical dates for termination rights, first rights of refusal on expansions, and renewal options.

Our experience is that the proper management of this type of “portfolio”, by a dedicated and skilled resource, can save your organization thousands if not hundreds of thousands of Rands .

Last modified on Wednesday, 21 May 2014 22:47

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