Strategic real estate consultancy is a core technical competency on the Corporate Real Estate pathway, and an optional one on the Commercial Real Estate, Facilities Management, Land and Resources, Management Consultancy, Planning and Development, Property Finance and Investment, Residential, and Valuation pathways.
It relates to the 'provision of strategic consultancy advice to clients on real-estate issues influencing the business'. At Level 3, this will involve the candidate advising internal or external clients and showing a clear understanding of the business context of real estate.
At Level 2, candidates should have experience of tasks such as researching an organisation's background, preparing and analysing data to inform real-estate strategies and identifying strategic responses to their requirements.
At Level 3, candidates should have provided strategic advice and recommendations to clients, and presented data to support this.
This article will take candidates through some of the key issues to consider when providing strategic real-estate services or advice to clients.
Aligning portfolio and business needs
Strategic real estate consultancy is essential to ensure that an organisation's portfolio aligns with its business needs, both current and future. If not, its assets are likely to be underperforming and underused, with a financial and operational cost. This creates risk and uncertainty. Strategic real estate consultancy, therefore, aims to realign an organisation's portfolio to match its overall business strategy and objectives.
By way of an example, the corporate objectives of supermarket chain Lidl are:
- to provide outstanding customer satisfaction
- to ensure market-leading quality and value by constantly innovating and optimising processes
- to work with business partners in sustainable relationships, contributing positively to local communities
- to achieve long-term success by investing in the recruitment, training and development of its people.
The chain's current property requirements include:
- prominent sites in town, district, edge-of-centre or out-of-town locations
- ideally, main road frontage with easy access and significant pedestrian or traffic flow
- freehold, leasehold or long leasehold opportunities
- unit sizes that are flexible in terms of design and scale between 1,300m2 and 2,500m2
- 0.6ha-plus stand-alone units, or up to 1.6ha mixed-use schemes by Lidl acting as or with a developer.
The question is, therefore, how might these requirements have been established, and what role does the property professional play in providing such advice?
'Strategic real-estate consultancy aims to realign an organisation's portfolio to match its overall business strategy and objectives'
Analysis and response
The starting point will be to analyse business performance and understand wider corporate objectives by undertaking a range of due diligence, including:
- market research on the company, sector and portfolio
- analysis of financial information, such as looking at historic accounts or company reports
- organisational structure, including whether any property services are outsourced or retained in house
- understanding the property portfolio, such as whether sites are trading or non-trading, freehold or leasehold tenure, as well as their location, use, lease terms and so on
- decision-making processes, including board approval procedure
- key stakeholders in the business, such as operations, finance and legal teams, directors or key personnel, and third-party advisers.
- aligning the portfolio with the business's objectives
- creating operational efficiencies
- identifying cost savings
- increasing the return on capital employed.
This work may involve detailed consideration of the portfolio using methods such as: red, amber, green analysis; benchmarking costs; options appraisal; development or refurbishment feasibility analysis; calculation of the marriage value for lease regears; and further market or demographic research. Each of these is explained below.
A red, amber, green analysis could involve using a portfolio spreadsheet with key lease terms and costs set out. Properties are then allocated a risk colour based on criteria that are important to the specific client, such as location quality, trading performance, or lease expiry or break date.
- commencement, when strategic content, objectives, outcomes, risk, control, implementation options, governance and stakeholder management are defined
- information-gathering, evaluation criteria and high-level appraisal
- shortlisting options
- validating processes and outcomes
- next steps.
A development or refurbishment feasibility analysis could be based on a development appraisal; that is, it takes the gross development value of the completed project and subtracts input costs and fixed land cost to derive the profit.
Sensitivity analysis or scenario testing can be carried out on the development appraisal to assess and manage risk for the client. This could be used for a redevelopment project or a surplus site, or to assess whether a refurbishment is viable according to differing levels of specification or cost, for instance.
The costs and risks of a lease regear can be assessed using a simple investment calculation, comparing the scenarios before and after. The former would value the existing lease terms and income profile, based on an appropriate risk adjustment yield, while the latter would value the proposed lease terms following the regear, with a yield shift applied to reflect the benefit. The difference between the two valuations can be calculated and split between the parties to assess the potential benefit of the deal to the client; that is, what incentive or concession could be negotiated between the landlord and the tenant.
Finally, further market or demographic analysis could be conducted. This could entail looking at a growth area in further detail, or identifying risks to the current market in which a company operates. Demographic analysis can help with strategic real-estate consultancy advice on location; for example, looking at sites with a high proportion of elderly residents for a care home operator, or considering transport hubs for a fast food operator.
Consultancy strategies
Based on the above analysis methods, there are a variety of strategies that candidates may recommend to clients. These include:
- providing advice on workspace strategy or planning, such as hot-desking, remote or flexible working, and relocating key hubs
- asset optimisation
- lease and leasebacks
- rationalising the portfolio, for instance by disposing of underperforming or non-trading or surplus stores, and site-specific relocations
- asset optimisation through lease engineering or regears, or securing key trading sites
- portfolio ownership and financial restructuring
- site inspections and audits
- dilapidations assessments and negotiations, including the way these are held in accounts following the introduction of International Financial Reporting Standard 16
- business continuity and disruption planning, such as for a managed shopping centre
- outsourcing services or retaining them in house
- comparison of capital and operating expenditure.
Advising
The final part of the strategic real-estate consultancy process is to advise the client on the proposed strategy and outcome. This will typically be in the form of a written report and formal presentation, including explanation and analysis of the data. Candidates should use a clear format, relating their work back to the wider operational objectives and the way the strategy aligns with these.
The candidate and client will need to keep the strategy under constant review, particularly as market conditions are dynamic and new risks or opportunities may arise at any point. Indeed, the current market presents particular risks and opportunities that candidates will need to incorporate into their advice.
- potential tightening of the Minimum Energy Efficiency Standard for commercial properties to raise the minimum Energy Performance Certificate rating to C, rather than the current minimum requirement of E
- business rates liabilities being at odds with current market rents in some locations
- end of the furlough scheme having cost and staffing implications for many companies
- increasing liability on residential landlords, such as electrical safety, which may affect commercial organisations with residential holdings; for example, where there is an ancillary flat to a shop forming part of a portfolio that is now surplus to requirements
- changes in corporation tax that may affect the way an organisation is structured or funded.
- widening of planning use class E, including former use classes A1–3 and B1, which may allow surplus properties to be repurposed or disposed of to a wider range of interested parties
- changes to planning policy, such as the draft London Plan
- growth in at-home and al-fresco dining when lockdown eases this summer
- growth in demand for homes in well-connected rural or semi-rural locations as flexible working continues to become normalised
- increased use of electric vehicles meaning that associated infrastructure is in greater demand.
In conclusion, candidates pursuing the Strategic real estate consultancy competency need to be market-aware. They must have an excellent overall understanding of the way businesses operate, their wider organisational objectives, and how a real-estate portfolio can be aligned to provide value. This includes giving advice on a variety of strategies, based on diligent analysis and market research.
Jen Lemen FRICS is a partner at Property Elite, providing training and support to RICS APC and AssocRICS candidates
Contact Jen: Email
Related competencies include: Strategic real estate consultancy