Agile capital planning for real estate investments

Neil Bullen

Global Managing Director, Real Estate

Our industry has talked for a long time about creating flexible real estate models that are better able to adapt to market shifts. The seismic shock of COVID-19 has put a heightened premium on such agility.

Crisis or catalyst?

With the emphasis now shifting to an exit strategy, cash flow starting to stabilise, personnel implications understood and contingency plans in place, business focus is turning to what comes next and how to manage capital investments in the medium term.

Organisations with large real estate portfolios – from tech companies to automotive businesses to financial institutions – are all undergoing a forensic examination of their capital outlays.

Some clients in hard-hit sectors like hospitality and retail plan to cut their capital expenditure by 30 - 50 percent. Commodity and share prices continue to show volatility and companies are understandably taking protectionist action in the face of shaky markets.

However, some businesses are ramping up their capital investments by as much as twenty per cent. For life sciences, data centres and logistics warehousing, in particular, the crisis presents an opportunity to capitalise on new consumer demands and market opportunities, driving a need for accelerated portfolio development.

Progressive clients are shoring up supply chains, capitalising on market buying gains and implementing new ways of working to increase productivity. One major pharmaceuticals company, for example, has brought forward its investment to drive a new enterprise delivery model and digital approaches to create competitive advantage.

Whether rationalising or accelerating, these rapid shifts in capital investment strategies are laden with risk if they are driven by myopia and reactivity. Real estate functions need to cut through the uncertainty and drive decisions through a sober analysis of known impacts, market scenarios and anticipated repercussions.

Reflection, not reflex

In past recessions, real estate has been one of the first areas for review, as one of the largest fixed items on a company’s balance sheet. However, knee-jerk reactions can have implications for longer term growth.

We have seen draconian cutbacks lead to portfolios that no longer best support business or customer needs, to life expired assets creating operational resilience issues, and to outdated working environments eroding the attraction and retention of talent.

So far, we are seeing a more considered approach than in 2008/9, with organisations looking forward to what a post-COVID-19 world may look like. Since the global financial crisis, progressive businesses have integrated real estate teams with strategic leadership, allowing for better decision making.

Investing in data

To influence the right strategies, we need better data across real estate programmes. This has been a weakness of the industry for the last decade, but the reality of being unable to travel and communicate on normal channels due to the virus has heightened the need for visibility and control over asset portfolios.

To fulfil its role, the strategic real estate function needs evidence on all aspects of its brief – from performance and maintenance costs to expenses that could be associated with the disposal of an asset. This equally applies to investment programmes where simply stopping work won’t always halt liabilities to suppliers.

Plan of action

The saying goes to never waste a good crisis. As we recalibrate to a ‘new un-normal’, there are three steps real estate professionals can take:

1. Review business vision and objectives

Despite challenging circumstances, your longer term vision and objectives may not have changed. Although you may need to row back from ambitious investment targets and certain new builds, your path to recovery may be quicker through increasing rather than decreasing capital spend. Consider carefully which investments are needed to get the organisation back on track quickly.

2. Re-visit investment appraisals

The economic case of your investment appraisals and business cases will need to be reviewed and reconsidered in light of your priority focus and needs. Funding restrictions and other commercial factors (such as supply chain issues) will need to be taken into consideration to ensure investments are still economically, commercially and financially viable.

3. Re-prioritise delivery

Once you have reviewed your objectives and any active business cases, you should take steps to formally re-prioritise your investment portfolio. You should set parameters for what constitutes a ‘must’ (health & safety, compliance, and business survival being potential factors) and decide where you draw the line between deliver or shelve.

Further resources

Please visit our COVID-19 response page for all of our resources relating to the impact of COVID-19 on the construction sector.

For further information contact:

Neil Bullen
Global Managing Director, Real Estate