Optimising Juridical-financial Flexibility of Corporate Real Estate

Abstract

Societal developments are timeless and occur at an ever increasing pace that affects demand for Corporate Real Estate (CRE). Real estate flexibility, as part of a CRE strategy, enables the ability to anticipate on those uncertain societal developments. Many studies refer to real estate flexibility which could be grouped into physical; technical; organizational; and juridical-financial flexibility. The focus in this article is on the latter.Juridical-financial flexibility is the management ability to quickly decrease real estate expenses or to quickly increase real estate benefits if the quantitative demand for space changes. The inclusion of juridical-financial flexibility can assure that the risk of redundancy or shortage of space is minimized through short term leases. However, it is accompanied with additional costs which makes maximal flexibility unprofitable, thus the question is which level of juridical-financial flexibility is optimal?We have built a decision model to determine the optimal level of juridical-financial flexibility in CRE portfolios, an operational step that is missing in the field of CRE management. The decision model is a linear programming model that produces a strategic recommendation to CRE management by defining the portfolio compilation with an optimal juridical-financial flexibility level. At this level, the financial investment in juridical-financial flexibility is minimal while the mix of juridical structures guarantees the ability to anticipate on an uncertain quantitative CRE demand in the future.In literature, several models have been developed that could be used to differentiate CRE assets into peripheries, based on their envisioned future strategic role. With these existing models, four peripheries are composed with the objective to link CRE assets to an appropriate juridical format. These peripheries are: the core ownership periphery, the core leased periphery, the 1st periphery, and the 2nd periphery.Next to the quantitative demand for space, also the qualitative demand is an important asset level aspect, at present and in the future. Therefore, the differentiation approach is applied per user profile to combine the two dimensions.The future demand for corporate space has an uncertain value, which is tackled with the differentiation approach, but to determine periphery sizes, three scenarios are developed with the current demand as a starting point.To transform a current into a future desired CRE portfolio