What do we do after we have picked the fruit?

Back from another property asset management conference where the key-note speakers having highlighted the size of the cuts the public sector are facing, offered the assembled attendees the solution of selling/not renewing leases for underutilised properties; considering flexible working, reviewing office use generally and selling/not renewing leases for the freed-up space. At question time one attendee, hardly disguising his frustration, asked, and I paraphrase here, “we have picked all the low hanging fruit already but we still have to achieve more ‘efficiencies’. What do we do now?” The speaker, who happened to be a civil servant and fan of Yes Minister’s Sir Humphrey Appleby GCB, KBE, MVO, MA (Oxon), responded accordingly.

Before going to the conference I was doing some work on a client’s data where they had implemented our modelling software based and the single integrated property model. I calculated the efficiencies from integrating the data and consequently the required work, delivered ‘efficiencies’ of some 6% without comprising the quantity or quality of the work delivered. In addition further ‘efficiencies’ can be realised by using the outputs from the modelling to facilitate better planning and programming. These are achieved by introducing more effective procurement methods such as longer term framework agreements that allow the supplier to programme the work and plan resources more effectively. There are plenty of apocryphal accounts as to the existence of the ‘efficiencies’ that could be achieved by introducing more effective procurement methods but little hard evidence as to the scale of them. I was, therefore, interested to learn at another conference that in Hamilton, Canada the local authority had implemented strategic asset management together with longer term framework agreements and the latter had actually achieved 5% to 7% savings. If we put these two together we achieve an average saving of some 12%. Hopefully that is more useful than a Sir Humphrey solution.

Will lease liability influence estate strategy

Until now it has always surprised me how little the directors and senior management of most business and commercial organisations have engaged with its real estate. It is after all often the second biggest overhead after people for many of them. Perhaps this is all about to change with the recent changes to the International Financial Reporting Standards (IFRS) adopted by the International Accounting Standards Board (IASB) to ensure that leases appear on a company’s balance sheet. This change which looks like it will need to be implemented for the financial year commencing 2012 will mean that some potentially large numbers for lease liability will go on balance sheets. In addition it will result in an immediate negative impact on profit and loss and a consequential adverse effect on key corporate performance indicators such as gearing and EBITDA ratios.
In the majority of organisations the lion share of leases will be for land and buildings so it will be surprising if the Boards of these organisations, especially those that have had a policy of leasing property, a policy that has until now kept property off the balance sheet, don’t start to look more closely at their real estate assets. Although the catalyst for this interest in real estate assets is financial, the corporate real estate manager’s response will need to be comprehensive and also include the property and business aspects.
There are a whole range of possible reactions an organisation might want to explore including that of a move to a freehold portfolio. The challenge for the real estate manager is, that while they make the relevant parties aware that there will be significant consequences to the balance sheet, profit and loss and corporate PIs, to assemble the data necessary to produce the metrics for these consequences. This will entail the real estate manager bringing together the data associated with the financial, property and business aspects of real estate into a coherent holistic database. This will not always be as easy as it sounds as traditionally this data is stored in disparate databases with data of varied quality. A recent Deloitte’s survey revealed that 65% of respondents said they were not confident in the data in their lease database.
The financial, property and business data in an integrated real estate database, much of which should be able to be fed from other systems, such as the finance system, will be need to be structured around a single property model so that it can populate the forecasts and strategic option appraisals which will be required to feed the estate strategy and plans in these changing times.

Visual inspections for property asset condition assessments

Recently I’ve been looking at condition surveys again. As part of this my attention was drawn to some research on visual inspection of bridges in the States. As serious research in this area is generally hard to find I looked at it to see if there were any lessons to be learnt. I was impressed by the quality and thoroughness of the work. What they did was to get 49 practicing bridge inspectors from 25 states to carry out inspections using the national rating system on 10 bridges. Below I have taken the results for one of the bridges that appeared to me as being typical.

As you can see there are 10 ratings in the USA for bridges and only about 40% of the inspectors agree about the rating of each of the three elements for this particular bridge. Now before you start to say that would never happen here, remember all these guys had on average just over 10 years experience inspecting critical assets similar to this one. This evidence seems to point to the fact that these are typical results for visual inspection of built assets.
Some years ago I was told that we human beings were generally good at distinguishing between up to about seven single faceted entities. More than this our ability to differentiate between one and the next one deteriorates rapidly. With this in mind I tried amalgamating the ratings into five and the results were as follows:

Now with only five ratings, which is more like the number I’m used to, between 61% and 74% of the inspectors agree about the rating of each of the three elements. Although a significantly less variable result it is still one worthwhile remembering when reviewing visual inspection data.