How corporate real estate affects shareholder value

Abstract

Shareholder value must remain central to the attention of corporate real estate officers (CREOs), even though senior executives have a number of competing agendas. One reason for this is that shareholder value is a vital performance indicator for any important ancillary service; another is that CREOs can help to improve shareholder’s wealth in a unique way. It is well known that occupancy costs directly affect the net earnings of the firm and thus the extent of any surplus it can generate over the annual charge for the use of capital. Occupancy costs also influence how large that charge for resources should be in the first place. Firms pay investors for the use of capital but, in efficient capital markets, the cost is only related to the risk that investors cannot remove by holding a basket of shares. This risk is the intrinsic variability of the cashflows derived from the activities of the firm. This variability is in turn influenced by the amount of company borrowing and by the ratio of fixed to variable costs. Even after allowing for the effect of gearing, the investor’s likely returns are determined by the amount of fixed costs required to generate sales revenues. This is important to CREOs because occupancy costs are a large proportion of most fixed costs. CREOs can therefore influence shareholder value both by the volume of all occupancy costs and by the proportion of fixed costs or leverage that their decisions incur. An indicator of the degree of real estate leverage (DREL) could therefore be a very valuable tool for CREOs. It would also give them more influence in key financial decisions and should raise more interest in real estate issues among shareholders and senior executives.