Research Papers
The significance of flexibility in improving return on property
investment: the UK perspective

Chris Simms
Portsmouth Business School, Portsmouth, UK, and
Beth Rogers
Portsmouth Business School, Portsmouth, UK
Abstract

Purpose – The purpose of the study described in this paper was to explore with property and
facilities managers to what degree they are able to achieve a good return for their organisations on
PFM, and what might facilitate or inhibit that.
Design/methodology/approach – Semi-structured interviews were held with 12 managers with
significant experience of property and facilities management (PFM). A variety of industry sectors, and the public sector, were represented in the sample. Within these interviews, the researchers were able to explore the opinions of respondents and the qualitative data gathered provided interesting insight on the research topic.
Findings – This research identifies that in practice it is extremely difficult for companies to achieve a wide spectrum of added value from property and facilities. Property management may have a lower profile in organisations than it deserves, with a concentration on cost rather than opportunity. A sense of resignation may be created by long leases, which are still “the norm” in the UK. The literature review and primary research show dissatisfaction with long leases and a strong preference for more flexible arrangements with landlords. Flexibility is inextricably linked to the expectation of bette return on property investment. The demand for flexibility is felt most acutely in economic recession, which causes organisations to consolidate space and manage property and facilities at a micro level.
Research limitations/implications – This research was based on a relatively small sample size
(12), collected from volunteer respondents in the south of the UK. On the basis of the findings, there is scope for further research on a larger scale, perhaps involving structured samples, quantitative data collection methods, and comparisons of the UK with a country where PFM choice is wider, such as the USA or Australia. Development of an economic model of the impact of flexibility on return on investment might be possible.
Practical implications – This paper provides a comprehensive discussion of how PFM is typically
managed in the UK and how property and facilities managers would like to see it improve in the
future.
Originality/value – This paper has identified an apparent suppressed demand for more flexibility in
the property market in the UK. This could be of use to PFM suppliers in designing future offerings,
and to the companies who use PFM services in articulating their requirements to suppliers.
Keywords Flexibility, Return on investment, Property management, United Kingdom
Paper type Research paper

Introduction

Corporate real estate and facilities costs represent the second highest cost to most
organisations after staff costs (Sminski, 2000). Property and facilities management
(PFM) can be an important method of improving financial performance, and adding
value to a company’s operations. Studies in Amsterdam (Krumm et al., 1998) and the
UK (O’Roarty, 2000) have identified several main elements of added value in real estate
management.
First, PFM makes a contribution to increasing productivity – if the working
environment is right, people within it can be more effective. Property issues must also
be considered in cost reduction or cash generation discussions. It is an essential
element of risk management: an inappropriate property portfolio can break a company;
a good formula can reduce risk.
In particular these studies highlighted the contribution that property management
can make to enhancing the flexibility of the firm – variation in working hours, working
space and other new ways of working. Last, but not least, PFM contributes to the
brand values and public relations of an organisation. An example given in our primary
research was that a tatty reception area could ruin visitors’ good opinions of a
company.
Efficient management of property can have a demonstrable effect on a company’s
performance. However, research from Debenham Tewson Research (1992)[1] (as cited
in Then, 1999) suggested that property management receives relatively little
management attention and time, and it is rare for property to receive treatment in
corporate plans. Property management within organisations has been identified as
being in general reactive, and there is evidence that property is only considered by
organisations when they are under severe profit or cost constraints.
One of the problems in the commercial property market seems to be the length of
leases, which makes it difficult for companies, especially those in fast-changing sectors,
to be as flexible as they would like. Achieving consistent return on investment in
property and facilities seems to require a proactive approach.

Literature review

The literature reviewed prior to primary research included studies from the USA and
other parts of Europe, as well as UK sources. To a considerable degree, the advantages
of proactive PFM seem to be universal, although the choices available to property and
facilities managers do vary by national market.

The importance of property management
Corporate real estate and facilities costs represent the second highest cost to most
organisations (Sminski, 2000). However, research has indicated that property costs are
decreasing as a proportion of total business running costs, predominantly through cost
control and a reduction in the amount of space needed (OPD, 2004).
Property management can be an important method of improving financial
performance, and adding value to a company’s operations. For example, De Jonge
(1996, as cited in Krumm and Vries, 2003)[2] identified seven main elements of added
value in PFM:
   (1) Increasing productivity. People working in sufficient, appropriate, hassle-free
   and healthy space are likely to be more productive.
   (2) Cost reduction. Efficient use of workspaces avoids waste.
   (3) Risk control. As far as possible, companies need to maintain flexibility in their
   property portfolio.
   (4) Increase of value. Doing the right thing at the right time with property can be
    very beneficial to a company, but it requires considerable knowledge ofthe property market.
   (5) Increase of flexibility. Companies can mix their financial risk in property
   (e.g. owning versus leasing) and their occupancy patterns (e.g. flexitime).
   (6) Changing the culture. Space plays its part in change in the workplace.
   (7) PR and marketing. The image of buildings and their location can contribute to a company’s
   corporate identity.

Considering the wide spectrum of potential added value it is clear that property
management is an important issue for companies.

Senior management attitudes to PFM
Efficient management of property can have demonstrable effect on a company’s
performance. However, property management receives relatively little management
attention and time, and it is rare for property to receive treatment in corporate plans.
It is viewed as an asset requiring little management (Debenham Tewson Research,
1992, as cited in Then, 1999)[3]. Property management within organisations has been
identified as being in general reactive, and there is evidence that property is only
considered by organisations when they are under severe profit or cost constraints
(Avis et al., 1989, as cited in Then, 1999)[4].
In fact, it is generally perceived that property is a business cost, rather than a
resource that requires strategic attention (Graham Bannock & Partners Ltd, 1994, as
cited in Then, 1999)[5]. This indicates that managers are unaware of the full
opportunities for improving their performance through property management. Many
companies are missing opportunities to reduce cost and enhance performance because
they give limited attention to managing their portfolio (Anderson, 1995, as cited in
Then, 1999)[6].
This lack of understanding in boardrooms of the contribution of property to
financial returns and shareholder value, means that companies may in some cases be
damaging their financial performance and with it shareholder value. Some companies’
may perceive that it would be difficult to change the current structure of their property
portfolio.

The importance of flexibility
Flexibility, particularly financial, is frequently considered essential to the survival and
performance of organisations. Organisations have reacted in a variety of ways to the
rapidly changing business environment of the past 15 years. For example, Gibson and
Lizeri (1999, as cited in Gibson, 2003) suggest that downsizing, delayering and
outsourcing non-core functions have become commonplace. There is increasing
demand in this modern business environment for property, which was once considered
an inflexible asset, to become more flexible. Gibson (2003) suggests that property
flexibility can be grouped into three key areas:
   (1) contractual (financial) flexibility;
   (2) physical flexibility – in how the space can be configured; and
   (3) functional flexibility – in the range of uses for the space.
Clearly, financial flexibility is of particular importance to managers in ensuring their
company’s continued survival and performance, and therefore receives great attention
in any property selection.
There has been a substantial increase in the number of companies that report only
leased property, and a fall in the number of companies that report only freehold
property, over recent years (Lasfer, 2003)[7]. The level of property held by UK listed
companies through operating leases has doubled over the past decade, from £34 billion
in 1991 to £68 billion. Research has shown that companies that lease their property are
likely to be larger than those reporting freehold property (Lasfer, 2003). The propensity
to lease is also higher in faster growth companies (Lasfer, 2003).
There are a number of reasons for a company to lease property, these include:
freeing up capital, ease of relocation and less responsibilities for management. Firms
with high costs of capital are more likely to lease (Krishnan et al., 1994, as cited in
Fisher, 2004).
According to Lasfer (2003)[7] companies that decide to lease property primarily do
so to reduce debt, to finance their growth prospects, to pass on tax allowances to the
lessors, and to conserve liquidity. By leasing, companies can have greater financial
flexibility, and may be able to avoid bankruptcy.
Leasing property is clearly demonstrated to have a positive effect on companies’
performance. Lasfer (2003)[7] finds that companies who lease property use it more
efficiently by holding 40 per cent less stock than companies’ with freeholds. Companies
that have a higher propensity to lease are found to have 20 per cent less debt, lower
financial gearing, a higher liquidity ratio, 25 per cent higher cash holding, higher growth
rates, and higher R&D expenditure (Lasfer, 2003). These companies also manage their
tax liability more efficiently (Lasfer, 2003). Companies that leased the majority of their
property outperformed the market by 71 per cent over the last 14 years (Lasfer, 2003).
Nevertheless, there are still concerns about whether leasing is flexible enough.
As O’Roarty (2000)[7] points out, the level of perceived flexibility of tenure by
business managers differs. These tenures are detailed below in order of perceived
flexibility:
   (1) five-year lease;
   (2) freehold;
   (3) fifteen-year lease with breaks at years five and ten;
   (4) ten-year lease; and
   (5) fifteen-year lease.
Clearly, the more flexible and short term a lease is, the greater the perceived flexibility.
In fact, The “Changing Face of Space” Report (Gibson, 1999)[8] also identified that
66 per cent of businesses would rather not hold a lease of more than ten years, while
30 per cent stated that even a five-year lease was too long.
The functional flexibility of space important to organisations, as unused space
represents a wastage of resources. Firms may look to decrease their core space, and
use short-term leased space to absorb the demands of individual projects
(Worthington, 2000). Three quarters of companies cannot justify holding surplus
space (Gibson, 1999). Therefore, in any leasing agreement the ability to modify space,
or reduce the leased space is likely to be perceived as significant added value.

Companies also find themselves under pressure from corporate governance
requirements to seek flexibility in property arrangements. The FRS 12 accounting
standard (provisions, contingent liabilities and contingent assets) requires up-front
provision on the balance sheet for the future costs of a lease on a vacant or sublet
property. Harvey (2004, as cited in Cooke, 2004) suggests that before this standard was
introduced companies could spread the effective loss of holding property, whether
vacant or sublet, over a number of years rather than it being recorded on the companies
accounts as an increased specific liability. The result is that some companies could find
their profit effectively wiped out (Harvey, 2004, as cited in Cooke, 2004).
The modern and fast changing business environment has emphasised a need for
companies’ to focus on core competencies, and outsource their other activities. In terms
of property, managers can address this need for flexibility in a variety of ways, such as
outsourcing facilities management, moving to serviced accommodation, changing their
mixture of freehold versus leasehold properties, and negotiating shorter leases.
Property management is an activity that companies’ can outsource in order to reduce
the amount of time spent on it in-house and to leverage professional expertise. Most
likely as a reflection of this more companies are beginning to want more actively
managed properties (Gibson, 2000).

Facilities management costs
O’Roarty (2000)[9] highlights that property costs are the important factor to companies
in acquiring facilities. The total cost of the property is important to managers in their
selection of an appropriate solution to their property needs. When considering the costs
of a company’s property or facilities, it is important to consider all the costs associated
with the facility, including services. Williams (1996) Associates identifies three generic
cost centres: premises, support services, and information technology. The research
finds that facilities costs account for as much as 15 per cent of revenue costs (these
include IT, business support costs, and premises costs).
Because facilities management costs represent such a significant proportion of a
company’s expenditure, managing this budget is critical. However, over 30 per cent of
companies’ do have the data to undertake a detailed analysis of them (Gibson, 1999).
Considering the importance of these costs, this is potentially a problem for the
future survival and performance of these organisations. This poses the question as
to whether it is likely to be better for many companies’ to outsource facilities
management to experts who have more experience in understanding and managing
these costs.

Tenant satisfaction in property leases
Despite the benefits possible from leasing property and outsourcing facilities, research
by the CFI Group and IPD (2005)[10] has shown that there is a high level of
dissatisfaction among tenants with the service provided to them by landlords.
Lease flexibility received the lowest satisfaction score by tenants and therefore may
be undermining business competitiveness. The results of this research indicate that
landlords should develop relationships with their tenants that are partnership based,
providing value to both parties, rather an adversarial relationship which has
traditionally been more common.

The research carried out on behalf of the RICS[7] (CFI Group and IPD, 2005) also led
to the development of a tenant satisfaction priority matrix. The matrix identifies the
following priorities among tenants:

  Landlord/agent communication. The low scoring factors were: seeking customer
feedback, proactive communication, respond in a timely manner, availability of
landlord.
  Lease flexibility. The low scoring factors were: including ease of adjusting terms
on existing leases, speed of reaching agreement over contract, ease of agreeing
terms on new leases, ease of sub-letting, break options to match business need.
  Contract detail. The low scoring factors were: ease of contract alterations,
additional clauses are fair, contract makes use of standard approach.
  Problem resolution. The low scoring factors were: how quickly a malfunction was
resolved, how the result turned out, treatment from facilities staff, ease of
reporting malfunction.

Despite the potential advantages of leasing, it has its challenges too. At an operational
level as well as a strategic level, proactive PFM seems to be needed.

Methodology
In mid-2005, Portsmouth Business School undertook research sponsored by Havant
International Limited, a property company that was Portsmouth Evening News
Company of the Year in 2004, to explore with property and facilities managers how
PFM decisions are made and to what degree they are able to achieve a good return for
their organisations on PFM, including what might facilitate or inhibit that.
Qualitative data was gathered between June and August 2005. Interviews were held
with 12 managers with responsibility for PFM. Nine were based in commercial
organisations headquartered in the southeast of England, and many managed multiple
sites, including overseas sites. Three worked for district councils on the south coast.
The role of these managers was primarily described as being strategic and financial,
the title of the interviewees typically ranged from facilities to property manager,
although one interviewees job title was the vice president of IT and real estate.
A financial director and a chief executive were also among the interviewees,
representing smaller firms. In local government the title of interviewees included
assistant valuer, head of estates and corporate property officer. Their responsibilities
included many or all elements of the property plan and providing advise on all aspects
of property to the council.
The companies interviewed for this research in most cases had leased properties; a
few also rented serviced office space. Only manufacturers tended to own some of their
property portfolio. The majority of council property is owned. Councils own a wide
variety of property and land, including housing, industrial land and units, car parks,
open space, and shopping centres.
All companies and councils involved in this research outsourced some facilities
services, although the degree to which they outsourced differed greatly. Whilst three
companies clearly relied heavily on outsourcing, including the smallest company
involved in this research, other companies (typically manufacturers) relied on service
contractors to a lesser degree.

Participation challenges
Whilst all the local authorities contacted were very keen to talk about their property
arrangements with the researchers, it was comparatively very difficult to recruit
private sector interviewees. Over a 100 companies were contacted, and nine were able
and willing to participate. There may be a variety of reasons for this disparity, but the
researchers noted that council officers have a perception of themselves as landlords
and therefore property managers. In the commercial sector, the core business of an
organisation is obviously dominant and property is a service it consumes. Two
interviewees commented that the importance of PFM was underestimated.

Questionnaire design
The interview structure had two parts. The first part consisted of open questions about
how property decisions were made in the organisation. The second part consisted of
open questions about what sort of decisions are made about property, in particular
concerning costs, change and outsourcing; and what might facilitate or inhibit them.
The second part also encompassed questions about what respondents expected PFM to
involve in the future. Care was taken to pose open questions to enable interviewees
to describe facts, attitudes and views in their own terms.

Limitations of the research
This research was based on a relatively small sample size (12), and therefore in-depth
discussions were required to explore the questions. The sample is also influenced by
the fact that the respondents were self-selecting volunteers. Respondents were assured
that their responses would be anonymous. As Saunders et al. (2003, 3e, p. 177) point
out, “Cases that self-select often do so because of their feelings or opinions about the
research questions.” They go on to point out that this may be entirely appropriate.
Twelve respondents with significant experience of PFM are likely to have important
and relevant opinions. The researchers were still able to achieve representation across
a variety of industry sectors.
Despite its limitations, the research has reinforced some points from previous
research, confirmed a suppressed demand for flexibility from PFM suppliers, and
indicated new lines of enquiry for future research.

Research findings
The decision-making unit (DMU) for PFM

In our primary research, we found that many people in organisations are involved in
property decision-making, and many stakeholders’ views are taken into consideration.
In fact, one interviewee considered that too many people might be involved in property
decision-making in his organisation.
Large companies have property managers and/or services managers for facilities.
Three facilities managers had a background as engineers, and ended up in the role
through taking on some responsibilities and the role slowly increasing, or through
project-based work. Only one manager mentioned that they were a member of the
BIFM, and had a facilities management career background.
Financial directors are always involved; and major decisions involve the chief
executive and sometimes the whole board of directors. It is clear that property and
facilities managers are in some cases keen to have a greater involvement in decision
making, particularly at board level. Users of space or services are often consulted, and
surveyors or property agents are used as external advisors.
Seven of the nine companies involved in this research had a member of the board
with specific responsibility for property. The person on the board with responsibility
was typically either a corporate real estate director or a financial director.
Based on the results of these interviews, in all companies it was clear that there was
a certain amount of delegated power, which allowed some property management
decisions to be made at a site or senior management level. A significant minority of
companies recognise the importance of property and it is a regular topic of discussion
at a senior level.

Circumstances that initiate PFM decisions
Based on the results of these interviews it seems that of the nine companies
interviewed for this research, effectively only four discuss property actively on an
ongoing basis, and one of these four companies has only recently began to discuss this
proactively. It is also worth noting that this may not be a representative sample, as it
seems quite likely that those companies with property managers willing to participate
in this research are likely to be more actively interested in property, and were therefore
more willing to be involved. If this is the case it is possible that property is even less of
a proactive discussion topic within companies than this research would suggest.
Typically, facilities managers commented that PFM were not discussed at board
level that often, only decisions over a certain value or of sufficient significance go to the
board, with most decisions occurring at a local or senior management level. At a local
level, the company’s property model was not an issue providing that things were
running smoothly. In a few companies, the facilities managers needed to review their
property requirements on a regular periodic basis. Proposals were then put forward to
the managing director or the board for decisions to be made. Property is usually
discussed proactively at board level at budget time, as it is “a big cost” and therefore
needs to be reviewed.
Typical occasions prompting major property reviews were consolidation of
property following acquisition, sub-letting property (or disposal) following contraction,
renegotiation of leases (e.g. if market rates change) and lease expiry. In one company, a
new facilities manager had highlighted property as a major area of financial wastage,
and had been given the opportunity to make major recommendations.
Property management can be quite complex in a large international firm with a
variety of sites and multiple uses of sites. One manufacturing multinational
commented that company property had become recognised as being of strategic
importance as potentially both an asset and a burden.
A good example of proactive PFM was a company that had investigated what
property was costing them in detail, and using the data together with growth/shrinkage
predictions to make a plan for each site. In the case of some sites where long leases
were in place, plans could not be implemented for some time, but there could be some
reworking of existing arrangements. (Another company in the study pointed out that
moving can be very disruptive to employees and reduce productivity, a cost which must
be considered when looking at the business case for property changes.)
The exemplar company also needed to consider workspace requirements to support
new working patterns – they planned to move away from a one person, one desk
model to a model that encompasses desks for those who have a need to be in the office
full-time, and “hot-desking” for those who do not. They also planned to invest in
customer-facing facilities so that they could avoid hiring hotels for events.
Operational PFM
It is clear that property and facilities managers are busy people, with some fairly
difficult day-to-day responsibilities.
The following examples are typical of “day-to-day” PFM challenges derived from
our primary research:

  “Battles” with the service company, as the service company’s responsibilities
were not entirely clear;
  installation of new equipment;
  recycling;
reduction in the number of staff at a site using the catering facilities, which had lead to the catering becoming uneconomical;
  refurbishment; and
  fulfilment of the landlord’s obligations, such as maintenance, facilities,
cleanliness and upkeep of common areas, and safety.

Regrettably, respondents commented that it was common to have problems with
lessors and service companies, with “inflexibility” seeming to be correlated with the
symptoms.
Because PFM costs represent such a significant proportion of a company’s
expenditure, managing this budget is critical. However, according to “The Changing
Face of Space” Report (Gibson, 1999), over 30 per cent of companies’ do not have the
data to undertake a detailed analysis of them.
All but one interviewee from the companies included in our primary research
believed that they had a complete picture of their property costs. Although most
admitted that some unexpected costs always occurred that can only be planned for to a
small degree. In most cases it was mentioned that yearly plans and forecasts had to be
produced detailing property costs, followed by reports at the end of the year. Generally,
information on property was consolidated at site level, which could be too broad a
measure if a site has many uses. Only one company specifically mentioned that they
tracked PFM costs per activity/workspace area. Most others seemed to allocate PFM
costs by floorspace or headcount.
Two facilities managers commented on the complexity and time-consuming nature
of the budgeting and reporting processes. Another pointed out that it can be very
difficult to keep track of all costs over the period of the financial year, and that things
can change rapidly.
Of the nine commercial sector interviewees, three did not or were not aware of
benchmarking of PFM costs occurring in their organisation, whilst six did undertake
some benchmarking activity to some degree. Of those companies that did benchmark
three utilised external consultants or property agents to help with the benchmarking
process.
A number of key factors typically prompt an examination of the value of a
company’s PFM costs, such as changes in economic conditions, rises in costs from
existing suppliers, and changes in the business causing a reduction or increase in the
need for space.
Research by the Chartered Institute of Purchasing and Supply (CIPS) (2002)
revealed that serviced office space is more cost effective than a conventional lease for
most small company or branch requirements. Most respondents with experience of
serviced offices thought them expensive but agreed that they were cost-justified for
occupancy of up to 20 staff.

Outsourcing experiences
All the companies surveyed had in place a high level of outsourcing of non-core
services, and six of the interviewees considered that their company was likely to
increase outsourcing to some extent into the future. No one interviewed considered that
his or her company would decrease outsourcing in the future. However, it is worth
noting that those companies with a more established level of outsourcing believed that
there was an important balance to be maintained between outsourcing and retaining
control of the facilities management function.
Most respondents commented that their companies did need to concentrate on their
core business and “get out of support services”, but there were qualifications to this
view. Some expressed concern that outsourcing resulted a loss of quality levels in
service delivery, or that good services cost more than in-house. One respondent
explained that, whilst it just did not make sense to have core staff concerning
themselves with issues such as catering, security, and gardening etc., in his experience,
outsourced providers needed managing in detail, and it was necessary to be doing that
function right before you could hand over management to an outsourced provider. One
other believed that value could be achieved through long-term relationships with
service contractors. One anticipated a situation where separate outsourced contracts
would be joined together into one package.

Suppressed demand for flexibility
One respondent in our primary research said that they were still waiting for the day
when landlords realise that they cannot get away with 25-year leases any more. He
compared the UK property market unfavourably to property markets in the USA and
Australia, where, in his experience, there was more variety in rental arrangements.
Flexibility was a common theme in discussion with respondents, but tended to be an
aspiration, rather than anything that has been experienced and could be described.
Lease flexibility received the lowest satisfaction score by tenants in the RICS survey
in 2005. The survey concluded that companies found it a difficult and protracted
process to adjust terms on existing leases, agree terms on new leases or arrange
sub-letting. The implication was that the relationship between landlords and tenants is
usually adversarial. Most research respondents perceived that the whole issue of
flexibility was a suppressed demand not really addressed by the property market.
The smallest company involved in this research, which was an IT company, had a
five-year lease, with two breaks. In addition to the lease, the company had a separate
arrangement for maintenance of the building. The interviewee saw this lease as key to
their flexibility whilst they were rapidly growing.
One of the respondents who had experience in different types of company
commented that companies in “stable” sectors of the economy might be quite happy with ten-year leases, but companies in more volatile sectors, such as IT, need shorter
leases and more flexibility.
In any leasing agreement the ability to modify space, or reduce the leased space is
likely to be perceived as significant added value.

Public sector variations
Councils typically own the majority of their property, which consists of both
commercial and non-commercial. Councils often use property as a source of income in
order to lower council taxes. Councils must manage their property proactively, as the
government is pressing local authorities to use their property more effectively.
Councils must provide a live document on asset management under the “Continuing
Performance Assessment” scheme. The council’s report is then inspected centrally
providing a grade for the council’s effectiveness.
Owing to the complex reporting and decision making process within councils, this
process meant that most interviewees believed that those people that should be
involved in decision making generally at some point in the process are involved.
However, one interviewee highlighted the importance of users as a stakeholder to be
involved in decision-making.
All council interviewees believed that their council had a high level of information
on property costs and that this was necessary because of the reporting and budgeting
that must occur each year. Benchmarking is relatively widespread in councils, with
property departments typically benchmarking against other councils via the
Association of Chief Estate Surveyors in Local Government and in some cases
against the private sector. Councils are under constant pressure to review the value of
their property, and it is a key priority of the estates department to keep costs low and
increase value for money. This means that most councils evaluate the value of their
property arrangements on an ongoing basis.
The local government respondents felt that councils would consider changing their
current arrangements if it could save them money, whilst maintaining quality levels.
Changes may be prompted if:

  results from benchmarking indicate poor performance;
  the council executive specifically ask the department to review the value of property;
  central government policy required it; and
  lack of staff to service a property became a problem.

Councils are active in outsourcing and likely to increase their outsourcing and/or
minimise the number of contracts by consolidating with one provider. Council
managers shared commercial property managers’ concerns about quality. It was also
noted that private sector organisations could find it difficult to report to councillors.

Conclusions and implications for managers

Management of property and facilities in commercial organisations is a critical
function given the large amount of money that companies have tied up in both.
Companies that have taken a pro-active approach have seen considerable benefits not
just in cost reduction, but also in better quality workspace. Unfortunately, since PFM is
effectively a “non-core” function, and fraught with adversarial relationships with
service providers, it has perhaps not received the focus or status that it deserves in
companies, whilst in local government, policy focus has ensured high status for the
function.
These research findings indicate suppressed demand for flexibility. The reality
for PFM decision-makers is that there are a number of inhibiting factors in the
market, such as the length of current leases that companies are tied into, that
make it difficult for them to add value through effective use of space and facilities.
The apparent “knock-on” effect of those inhibiting factors is that senior
management interest in PFM does not appear to be regular and sustained.
Given the high proportion of costs tied up in PFM in most companies, this is
disappointing. Co-operation between facilities managers and accountants in
identifying how activity-based costing might be applied to space and facilities
could help to address internal inertia.
Some sectors of the economy are more cyclical and likely to need to flex their
workspace up in growth periods and down in recessions. The sectors most susceptible
to economic fluctuations in recent years have included IT, recruitment, training,
consultancy and marketing services. Consolidation of property and facilities after
merger and acquisitions activity is usually necessary in all sectors. Companies who
experience phases of growth and consolidation need to micro-manage space, and others
need contingency plans for recessionary pressures, which are bound to include PFM
change. Demand for flexibility in lease and facilities arrangements seems bound to
increase.
It is surprising that this apparent suppressed demand for flexibility has not become
overt demand. Obviously, the nature of the property product and facilities service gives
suppliers considerable “lock-in”. Some respondents have highlighted the productivity
problems associated with moving premises, which has to be considered in the business
case when property overhead becomes a burden. Although relationships with
landlords and facilities companies are already adversarial in many cases, focused
pressure from tenants is surely key to persuading PFM suppliers to adapt to customer
needs. Perhaps this is a suitable cause for associations representing small and medium
sized companies.

Future research

On the basis of these findings, there is scope for further research on a larger scale,
perhaps involving structured samples, quantitative data collection methods, and
comparisons of the UK with a country where there is a greater variety of lease,
rent and services choice, such as the USA or Australia. Development of an economic
model of the impact of flexibility on return on investment might be possible.

Notes

   1. Based on interviews with 100 major companies.
   2. Study carried out in Amsterdam.
   3. Based on interviews with 100 major companies.
   4. Based on a survey with 230 organisations.
   5. Based on personal interviews with 12 finance directors of UK private sector companies,
followed by a postal survey of 111 property managers.
   6. Based on 20 companies across European countries in three sectors: financial services,
manufacturing and retail/distribution.
   7. Based on all quoted companies in the UK over the 1989-2002 period.
   8. UK survey of businesses carried out in 1999.
   9. Depth interviews undertaken with 17 UK-based companies, which together occupied in
excess of 5 million square meters of office space.
  10. Based on 66 interviews with IPD members across the UK.

References

CFI Group and IPD (2005), RICS Tenant Satisfaction Index – Tune in to tenants.
Chartered Institute of Purchasing and Supply (CIPS) (2002) Chartered Institute of Purchasing
and Supply (CIPS) Report 2002, The True Cost of the Flexible Office.
Cooke, H. (2004), “FRS 12: guidance on implementation for corporate real estate managers”,
Journal of Corporate Real Estate, Vol. 6 No. 4, pp. 309-24.
Fisher, L.M. (2004), “The wealth effects of sale and leasebacks: new evidence”, Journal of Real
Estate Economics, Vol. 32 No. 4, pp. 619-43.
Gibson, V. (1999), MWB Business Exchange Report: The Changing Face of Space.
Gibson, V. (2000), “Property portfolio dynamics: the flexible management of inflexible assets”,
Facilities, Vol. 18 Nos 3/4, pp. 150-4.
Gibson, V. (2003), “Flexible working needs flexible space? Towards an alternative workplace
strategy”, Journal of Property Investment & Finance, Vol. 21 No. 1, pp. 12-22.
Krumm, P. and Vries, J. (2003), “Practice briefing: value creation through the management
of corporate real estate”, Journal of Property Investment & Finance, Vol. 21 No. 1,
pp. 61-72.
Krumm, P., Devulf, G. and DeJonge, H. (1998), “Managing key resources and capabilities:
pinpointing the added value of corporate real estate management”, Facilities, Vol. 16
Nos 12/13, pp. 372-9.
Lasfer, M.A. (2003), Driving Shareholder Value: Corporate Real Estate – Freehold vs Leasehold,
Donaldsons Research, CITY Business School, London.
OPD (2004) OPD Final Report 2004, Occupiers Property Databank Ltd.
O’Roarty, B. (2000), “Flexible space solutions: an opportunity for occupiers and investors”,
Journal of Corporate Real Estate, Vol. 3 No. 1, pp. 69-80.
Saunders, M., Lewis, P. and Thornhill, A. (2003, 3e), Research Methods for Business Students,
Prentice-Hall, London.
Sminski, D. (2000), “Flexible real estate through knowledge of tax implications”, Journal of
Corporate Real Estate, Vol. 3 No. 1, pp. 62-8.
Then, D. (1999), “An integrated resource management view of facilities management”, Facilities,
Vol. 17 Nos 12/12, pp. 462-9.
Williams, B. (1996), “Cost-effective facilities management: a practical approach”, Facilities, Vol. 14
Nos 5/6, pp. 26-38.
Worthington (2000), “Accommodating change – emerging real estate strategies”, Journal of
Corporate Real Estate, Vol. 3 No. 1, pp. 81-95.

Further reading

Barris, R.D. (2002), “Sale-leasebacks move to the forefront: what is motivating buyers and sellers
and what are the preferred methods?”, Briefings in Real Estate Finance, Vol. 2 No. 2,
pp. 103-12.
Beattie, V., Goodacre, A. and Thomson, S. (2000), “Recognition versus disclosure: an
investigation of the impact of equity risk using UK operating lease disclosures”, Journal of
Business Finance & Accounting, Vol. 27 Nos 9/10, pp. 1185-224.
Devaney, S. and Lizieri, C. (2004), “Sale and leaseback, asset outsourcing and capital market
impacts”, Journal of Corporate Real Estate, Vol. 6 No. 2, pp. 118-32.
Louko, A. (2004), “Four cases of corporate real estate portfolio outsourcings”, Journal of
Corporate Real Estate, Vol. 7 No. 1, pp. 72-86.
Rosenberg, R. (2000), “Commercial market trends March 2000: new reasons for sale leasebacks”,
Realtor Magazine, March, p. 60.
Royal Institute of Chartered Surveyors (RICS) view – commercial leases (2004), available
at: www.rics.org/property/commercialproperty/leaseholdcommercialproperty/ (accessed
26 May 2005).

Corresponding author
Beth Rogers can be contacted at: beth.rogers@port.ac.uk


  
 
 
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The significance of flexibility: