Every so often, the public sector seems more nimble and clever than the private sector, and real estate has been a shining example. In the 1980s in Britain, for instance, government agencies led the way in outsourcing their building management operations. And the Department of Social Security's deal to sell 700 of its properties to the Goldman Sachs-backed consortium which would own, operate and redevelop the sites has been a mould-breaker for corporate property ownership.
Most recently, Spanish telecom's group, Telefonica, has hired Bankers Trust to consider how best to spin off the company's nearly $3 billion in property assets into a separate company with a focused management.
Admittedly, the company is now privatised, but only newly so, and its enormous real estate portfolio is a vestige of its former public status.
The question is whether Telefonica's decision, which is understood to create ultimately Spain's largest listed property company, will inspire other corporations to try to unlock the value held in bricks, mortar and land.
The real estate group of Ernst & Young, the accountancy firm, has recently produced a report concluding that companies can improve returns on capital by disposing of their real estate assets.
The catalyst for the research, says Penny Wesley, executive consultant and head of corporate real estate, has been the activity in the public sector. "The government sector has been leading the way."
Arguably, the trend suggests that taxpayers have been more effective in demanding performance than have shareholders., a conclusion which speaks poorly for the latter group.
Nevertheless, there are signs that in the US, at least, the message is getting through. John Coppedege, senior director of central and western European and Asian property at consultants Healey & Baker, says that corporations often own property for the wrong reasons.
"They like having their own headquarters," he says. "It is a monument to themselves." But the taste for corporate ownership of real estate, spurred by the soaring market of the 1980s, soured during the recession. "IBM is the best example of this," he says. "When the music stopped and the recession started, IBM said `Wait a minute, what are we doing?'."
According to E&Y, property costs are typically 20 to 30 per cent of operating overheads, second or third only to personnel costs. Ms Wesley points out that in addition to the capital tied up in corporate ownership, companies have had to retain extensive property departments to manage estates.
These are not necessarily infused with the appropriate entrepreneurial culture which will allow them to extract the most value from their assets.
"Real estate team leaders are too focused on low, added-value property issues and hence are poorly equipped to contribute at board level regarding strategic issues such as ownership and finance," the E&Y report concludes.
E&Y's research shows that UK corporate ownership of real estate is highest in the banking and retailing sectors where the businesses need to occupy a large number of disparate sites.
At food retailer Safeway, for instance, roughly two-thirds of total assets were freehold real estate as of the year ended March 29, 1997. Tesco held a similar percentage in freeholds while Marks and Spencer held roughly one-third in property freeholds.
If UK shareholders have not been in the habit of questioning corporate property ownership, perhaps the export of US analytical methodology will force some changes. E&Y notes the growing use by shareholders of so-called Economic Value Added (EVA) methodology from the US, which attempts to measure returns on capital from underlying income, and to compare that against a corporation's own weighted average cost of capital (WACC).
Companies are being forced to demonstrate that their investments earn higher returns than the cost of capital, and those investments include bricks and mortar.
THE US investment bank J. P Morgan, in a sample exercise illustrating an EVA analysis, concluded that UK supermarket chain Sainsbury's could increase its share price by 10 per cent by reducing its fixed assets to 40.9 per cent of sales from 43 per cent. Sainsbury's, according to E&Y, had slightly more than half its assets in freehold properties as of March 1997.
E&Y, in a sample exercise of its own based on an unnamed UK financial services company, concluded that even with all the costs associated with renting, rates of return may be increased by 17 per cent to 36.5 per cent from 30 per cent by disposing of a real estate portfolio in its entirety. The analysis assumed that the company earned a rate of return on property of 2 per cent.
Ms Wesley cautions that there remain several good reasons for corporations to continue to own their own buildings. For one thing, many older properties are held on balance sheets at book value, tying up little capital in the first place.
Also, in the US, depreciation is a tax-deductible expense which can shield income. Selling a building means giving up that tax break.
Moreover, selling a building and leasing it back means taking on a new expense - rents. And renting means seeking the landlord's permission every time the tenant wishes to remodel the premises, allowing occupiers to be held hostage to landlords' demands.
Also, some properties, particularly industrial space, are unique to the needs of the corporate occupier. To risk the sale of a property under such circumstances is plain foolishness.
Nevertheless, E&Y argues, it is worth a corporation considering a long-term strategy for its occupancy needs and only then decide what it should own.
As long as there is a positive arbitrage between the rate of return you can achieve by re-investing property proceeds and the cost of renting premises, it makes sense to look at the sale of property, says Mike McNamara, executive consultant in the E&Y real estate group.
