Criteria for Effective Utilization of Corporate Real Estate

Regarding the effective utilization of corporate real estate, I will explain from the perspectives of owner-occupied real estate and investment real estate.

When it comes to the real estate currently owned, it is crucial, from the standpoint of asset optimization, to consider whether to continue holding it as is or to make alternative decisions, regardless of whether it is for owner-occupancy or investment purposes. For owner-occupied properties, key considerations include options such as transitioning to rental properties or engaging in sale and leaseback arrangements. In the case of investment properties, determining the optimal timing for selling becomes important. By conducting simulations based on future cash flow projections, it becomes possible to analyze and contribute to the medium-to-long-term enhancement of corporate value.

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Background of the Demand for Effective Real Estate Utilization

Corporate Real Estate (CRE) strategies have been gaining attention as a business strategy to enhance corporate value by effectively utilizing the real estate owned by companies. However, following the COVID-19 pandemic, there is a growing momentum to reevaluate the approach to holding real estate.

With the progression of remote work leading to the downsizing of office spaces and the anticipated population decline in the future, reconsidering the effective utilization of real estate in terms of ownership, sale, usage patterns, and more, seems to contribute to the medium-to-long-term enhancement of corporate value.

In this article, I would like to discuss initial criteria for effective utilization from the perspectives of two types of real estate: owner-occupied properties such as company-owned buildings, and investment properties such as rental buildings.

Criteria for Effective Utilization of Owner-Occupied Real Estate

Owner-occupied real estate refers to properties owned by a company and used for its own business purposes, such as company-owned buildings. In recent times, there have been instances of companies selling their own office buildings to transition to renting. In this context, I would like to explore the initial criteria that should be considered in such decision-making, along with reference simulations.

The decision of whether to continue owning a company-owned building or to transition to renting can be assessed by comparing the respective economic values at the current point in time. This comparison can serve as a useful reference. In this context, let's consider an example where the economic useful life of the building is 10 years, and conduct a simulation based on this period.

According to the calculations above, the result indicates that the option of transitioning to renting is favorable due to its higher present value. The calculations in Simulation 1-2 are based on the premise of a sale and leaseback arrangement, where the company sells the property and simultaneously leases it back from the buyer, without considering relocation costs and other factors. This is an initial assessment example, and further adjustments tailored to specific assumptions, as well as consideration of additional costs, should be made according to individual circumstances. However, it's confirmed that the option of renting is worth considering (especially when there is surplus office space and downsizing rental area through selling becomes more significant, or when there is an immediate need for funding).

Criteria for Effective Utilization of Investment Real Estate

Investment real estate refers to properties that generate income through leasing to tenants, rather than being used for the company's own operations (this also includes properties owned with the anticipation of property value appreciation).

The evaluation of investment real estate is based on the present value of future income and expenses. Therefore, estimating the various income and expense items over the analysis period is crucial. Typically, multiple scenarios, such as immediate sale, continued ownership as is, or implementing renovations, are considered and compared.

In this context, let's compare the scenarios of immediate sale and continued ownership (holding for a 10-year economic useful life of the building) using an example of underutilized real estate (where the building size is smaller than what the land area and permissible floor area ratio would allow).

According to the calculations above, the result indicates that the option of immediate sale is favorable due to its higher present value. In the calculations for continued ownership, it's assumed that at the end of the final year, a regular building lease agreement is in place, and calculations are based on the assumption that there is no need for relocation fees, etc. Additionally, for rental income levels that don't exhibit significant changes compared to the price, a flat rate is assumed throughout the analysis period. Since this analysis is also preliminary, detailed adjustments should be made to align with specific circumstances. However, it's confirmed that the option of early sale is worth considering.

Summary

Based on the analysis presented above, it becomes evident that in both cases of owner-occupied real estate and investment real estate, the estimation of future cash flows and property values is of paramount importance. By incorporating the specifics of the real estate market and the individual circumstances of the properties in question, a more refined analysis becomes achievable.

Particularly, making estimations concerning rent and repairs and updates is a challenging aspect even for real estate experts. Therefore, conducting a detailed analysis of historical trends, surrounding development conditions, and similar cases is crucial for constructing compelling simulations.

At Deloitte Tohmatsu, there is a team of experts specializing in real estate, construction, data analysis, and more. This means that support for these simulations is also available.