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.