Corporate Journal Volume 4 Number 4

The role of corporate real estate in developing countries of the Asia-Pacific region

Rajesh Mutreja*, Ming Lee Chua and Apara Guha Received (in revised form): 7th May, 2015 *Hindustan Unilever Ltd, Unilever , B.D. Sawant Marg, Chakala, Andheri (E), Mumbai-400 099, India; Tel: 91 22 39832109; E-mail: [email protected]

Rajesh Mutreja, a graduate in mechanical Apara Guha is Managing Director — Client en­gineering, is Consultant-Global Real Coverage APAC, Occupier Services, for Estate, Workplace Services-Enterprise and Cushman & Wakefield (C&W). She has over 20 Technology Solutions (ETS) for Hindustan years’ real estate experience, 17 of which have Unilever Ltd. He has wide ranging experience in been with C&W, having been part of the found- project management, facilities maintenance, ing team at C&W India in 1997. Her background supply chain operations and corporate real is in commercial agency brokerage before transi- Rajesh Kumar estate functions. In recent years he has worked tioning to corporate account management, with as ‘Head of Project’ for the development of a a focus on developing accounts regionally and new office campus for Unilever in Mumbai, com- globally for C&W and new business develop- prising 600,000ft2 of constructed area on a site ment. Apara has significant experience globally of 12.5 acres. Since mid-2013 he has been having worked in C&W’s London Client Solutions engaged as ‘Business Consultant-Global Real team managing global and regional (EMEA) Estate’ for Unilever’s real estate activities world- accounts for the firm before moving back to the wide and has been pursuing real estate propos- Asia-Pacific (APAC) region in 2011 to set up als in several countries. C&W’s APAC account management platform. She has significant experience particularly in Ming Lee Chua Ming Lee Chua is Global Real Estate Director, emerging markets and with the manufacturing Planning and Strategy for Unilever Asia Pte Ltd. sector in both mature and immature markets, She currently has three portfolios: (1) global real allowing for a unique cross-border perspective. estate transaction governance and management lead; (2) strategy and planning role focused on Abstract the integrated workplace services plan and also This paper discusses the current role, multifaceted real estate drivers in OPEX and revenue; and (3) challenges and opportunities that the future holds for operational responsibility for transactions in the the corporate real estate (CRE) function and CRE South East Asia, Australia/New Zealand (SEAA) professionals operating in developing countries, which Apara Guha cluster. Unilever has a global portfolio of 110 mil- often share several common trends. It identifies the lion ft2 (offices, retail, manufacturing and ware- drivers of change, as the real estate activity moves ) with a total asset base of €2.6bn. Ming from a largely unorganised sector to an organised sec- Lee works very closely with internal stakeholders, tor. It highlights the multifaceted challenges faced by business partners and external service partners the CRE function, eg talent acquisition and reten- to provide strategies to meet business needs and tion, ‘work from anywhere’ workplaces, centralisation Corporate Real Estate Journal Vol. 4 No. 4, pp. 314–322 drive consistent delivery and portfolio perfor- of processes and the need for increased collaboration © Henry Stewart Publications, 2043–9148 mance in Unilever’s real estate portfolio. with procurement, HR, Finance and IT, etc. Finally

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it highlights how the CRE role is moving up the a year.1 In China, the GDP share of real estate value curve and how CRE professionals are acquir- grew from 5 per cent in 2000 to 15 per cent in ing the skills and mindset of a ‘solution provider’ 2012, with 14 per cent of urban employment rather than merely a ‘service provider’. coming from real estate and related sectors.2

Keywords: organised sector, profes- sional approach, solution provider GROWTH OF THE ‘ORGANISED mindset, workplace collaboration, the SECTOR’ value curve, ‘supporting’ to ‘owning’ There has been a trend in real estate to move from an unorganised status to an organised one. The drivers of this shift are: INTRODUCTION It is no surprise that, after the agriculture sec- •• accelerating growth of business process tor, it is the real estate sector that drives the outsourcing (BPO) from this region lead- highest level of employment in most develop- ing to the entry of MNCs with specific ing countries; however, most real estate activ- and stringent real estate needs; ity in these countries still lies in the broad •• rise of ‘local-global’ conglomerates as local category of an ‘unorganised sector’. This is achieve global scales riding on because a large number of the investments huge domestic demand, as well as off-­ made in the housing sector are catered for by a shoring of manufacturing, resulting in large number of local and small developers/ additional space and related infrastructure contractors. Therefore, compared to other requirements like modern warehouses; and industries in the organised sector, there has •• entry of large and professional business been much less deployment of qualified pro- houses and private equity funds into real fessionals or corporate practices in the /investment to cater estate sector. But this trend is now changing, for the underlying need for reliability of especially in the last two decades, due to rapid delivery, conformance to quality standards economic development in most of these and sustainability, investment friendly developing countries. As a result, corporate business practices and the need for invest- real estate (CRE), as a discipline, is rapidly ment liquidity. growing and continuously evolving to provide a professional approach to meet the real estate One indicator has been the growth of inter- needs of multinational corporations (MNCs) national consultants (IPCs) in these operating in this environment. countries, with most of the IPCs reporting a phenomenal rise in the number of their employees deployed in all aspects of real estate REAL ESTATE AS A SIGNIFICANT consultancy, ie transactions, facilities man- CONTRIBUTOR TO APAC’S agement, project management and, lately, DEVELOPING WORLD ECONOMY portfolio planning and management. In addi- The contribution of real estate to the GDPs of tion, a large number of corporations that are many developing countries has been rapidly occupiers of real estate now have real estate growing in the last decade, depending upon professionals within their organisation, either the state of the economy of these countries, in-house or out-sourced, to add value to with significant employment opportunities their real estate services for business stake- tied to their GDP share. For example, the GDP holders (Figure 1). Although the level of share of real estate in India was 6.3 per cent in engagement within these organisations may 2013 and expected to generate 7.6 million jobs be varied across different types of industry, it

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Figure 1 CRE value proposition Source: Cushman & Wakefield

is growing rapidly, especially due to an aware- CRE CHALLENGES ness created by regular success stories in the As CRE work matures in the Asia-Pacific press and educational efforts by several pro- (APAC) region, it is important to recognise fessional bodies like CoreNet Global, which some of the unique situations and challenges is a leading association for CRE and work- facing CRE professionals. place professionals and service providers. Another interesting trend in the last Attracting and retaining talent decade relates to the growth of IPCs and Exponential growth in this region has cre- other property consultants. Although ini- ated a dearth of qualified and experienced tially these consultants were engaged primar- real estate professionals. Countries like India ily for real estate transactions, they made and China face the brunt of this talent war forays into facilities and project management particularly regarding mid and senior-level that are now growing faster and form the management positions. bulk of their employee strength. This trend is expected to continue as real estate continues Governance processes to move into the ‘organised’ sector and cor- Most developing markets in the APAC porations wish to remain focused on their region have limited access to information in core business areas. Driving efficiencies in the public domain. For most CRE profes- non-core areas like project execution and sionals, combining governance needs with maintenance of facilities increasingly is being pragmatic delivery solutions can be a chal- achieved through appropriate outsourcing. lenge. These challenges range from ensuring What is even more interesting is that, even in proper documentation for occupation to the housing sector that forms the bulk of the having to deal with differing legal opinions ‘unorganised sector’, IPCs increasingly are on titles, liaising with local statutory author- being engaged for sales transactions, project ities and government bodies, dealing with execution and even facilities maintenance, as complicated tax structures as well as possible house buyers become more discerning and involvement of labour or farmers in a dia- demanding regarding reliability and quality. logue on infrastructure or land deals.

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Speed of delivery of projects their portfolio need to encompass a wide spec- The cycle times for project delivery quite trum of asset classes and variety of applications. often are unpredictable. Projects have been The added dimension of diversity in asset known to take as long as 3–5 years to deliver, classes often makes it more challenging to add and there is the risk of a higher rate of failure value by way of finding synergies in use, weed- in these markets due to litigation and chang- ing out space inefficiencies and finally ‘moneti- ing policies. Clear planning, delineation of sation’ of underutilised assets to support the roles and responsibilities, monitoring and overall business needs and future growth. communication combined with strong rela- tionship management with both internal and Consolidation of suppliers external stakeholders can be deciding factors Large organisations increasingly are central- between success and heartache. Therefore, ising their support functions to drive profes- in this region, for large transactions or proj- sional and operational excellence, as well as ects, it is highly advisable to have early to gain financial benefits from economies of engagement of professionals from all levels of scale. In recent years several initiatives have real estate services and to ensure adequate been seen, such as the ‘power of one’ initia- time for proper due diligence — often three tive, which capitalises on a small, but highly months to a year to prevent any surprises. focused and organisationally aligned, num- ber of vendors for services, working as valu- Portfolio composition able partners. For example, at Unilever, the In the APAC region, portfolios tend to be far number of vendors for some services has more diverse both in terms of physical and been reduced dramatically from the earlier geographic distribution as well as having to numbers that ranged in the hundreds across deal with multiple owners for a single site. For the regions. This reduction has been facili- example, most manufacturing companies will tated by centralised procurement functions have distribution sites that are owned or leased with specialised skills for negotiating global assets as well as third party service provider ‘master agreements’, supported by local ‘ser- partnerships. Therefore, a single asset class of vice agreements’ in various geographies. warehouses/distribution centres can have up to Therefore, the CRE function also gets to three distinct ownership models. For effective share the aimed benefits although it requires and efficient portfolio management and rela- a change in the ways of working and a far tionship building, one has to be aware of these greater partnership with procurement. These differences. In addition, the growth of many changes are quite significant and their imple- corporations often has been in unrelated sec- mentation often can be challenging for pro- tors, depending upon where opportunities fessionals in developing countries as, for were presented by the exponentially growing historic and statutory reasons, their organisa- economies. For example, a company involved tional structures tend to be autonomous. in the manufacture of salt may also run tele- communications services as well as being an Changing workplace processes airline provider. Also, as the growth of these With the changing definition of what is a companies is often through multiple acquisi- workplace (see Figure 2), CRE professionals tions and mergers, they end up with a wide now need to collaborate more extensively diversity of assets, which can range from tradi- with internal stakeholders, including finance, tional to speciality assets like tea estates, agri- procurement, human resources (HR) and culture farms and employee housing. Therefore, information technology (IT), to sense the the real estate strategic and planning inputs for pulse of employees and their changing expec-

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Figure 2 Work is no longer a place you go to Source: Cushman & Wakefield

tations of work spaces and technology, and to This includes specific and ambitious work- ensure that the shelf life of their real estate place targets to reduce energy, water and choices is reasonably long. To rightly earn waste. Similarly, many other organisations their seat at the decision-making table with have set clearly defined targets for reducing senior leaders, CRE professionals need to energy and water consumption, which conse- increase their financial acumen and acquire quently greatly impact the choices they make other functional skills in order to provide a in their real estate decisions, throughout the comprehensive business case, which not only life cycle of the property. covers real estate considerations, but also encompasses other business-related param­ Benchmarking and research eters. This only can be achieved by dovetail- Senior business stakeholders now demand ing real estate strategy into business strategy more data-based decisions and, conse- with the help of finance and business partners. quently, CRE professionals are increasingly Sustainability is very high on the agenda of required to share with them key market most organisations. For example, the Unilever practices, risks and opportunities in advance, Sustainable Living Plan has set the goal of when recommending any real estate solu- halving the environmental footprint in the tions. Decision making has moved towards making and use of their products by 2020. being more objective and process-oriented

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rather than just being based on business vice provider’ and ‘order taker’, having to relationships, emotions and ‘gut feel’. This meet a lower level of performance metrics, to decision making requires an incisive analysis that of a proactive ‘solution provider’ often of market trends backed by reliable and taking on audacious targets to support busi- continuously updated data from a wide ness goals (Figure 3). variety of sources, as well as suitable research Change has been primarily driven by to enable scenario building and good fore- MNCs seeking a consistent service platform casting. IPCs, therefore, have stepped in to across a region or globally, supported by pro- fill this important need by having dedicated fessional property companies. Interestingly, market research teams for the benefit of the frequency of paradigm changes tends to their clients, and they issue regular reports follow the economic cycles. When markets for all geographies. are booming, and businesses are doing well, there is less attention on real estate efficiencies and decisions tend to be more reactive and CRE ORGANISATION: EVOLUTION driven by immediate growth needs. When FROM ‘SERVICE PROVIDER’ TO there is a downturn in the market, the busi- ‘SOLUTION PROVIDER’ ness focus shifts from rapid expansion to shor- In view of the challenges explained above, ing up the bottom line through aggressive the CRE function has been changing gear to cost-savings. Given that real estate typically provide timely and ‘fit for purpose’ solutions tends to be among the ‘top five’ cost centres in that enhance business performance. Over the an organisation, effectively managing a real past 15 years, CRE has evolved in the APAC estate portfolio will result in a direct impact to region from ad hoc use of local brokerage by a company’s financial objective. Therefore, various functions within the organisation to a business stakeholders are more willing to con- sophisticated model charged with client rela- sider changes and new ideas from CRE teams tionship management (CRM), governance during this period. Typically, IT and telecom- and cost optimisation. The mindset is fast munications (IT&T) companies have been changing from that of a reactive internal ‘ser- ahead of the curve when it comes to building

Figure 3 Possible organisational structures and their implications Source: Cushman & Wakefield

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CRE teams and partnering with property turning now from pure ‘best cost’ decisions firms for delivery, while more traditional sec- to a more integrated ‘value proposition’ tors, such as manufacturing, have been late approach. Greater global accountability, fol- starters, although there are some notable lowing the Enron and WorldCom melt- exceptions (like Siemens), with some embark- downs, has increased the level of corporate ing on the journey 18–24 months ago. governance, and this is now a key element of The evolution of outsourcing real estate consideration which has driven many cor­ services in the APAC region has been driven porations to review how their real estate is mainly by US companies, which tend to be being managed. While US companies have more centralised with CRE teams having tended to be more centralised and manage direct reporting into the USA. European their real estate globally, the checks and bal- companies are generally seen to operate in a ances have been increased. For European far more decentralised fashion, allowing local companies, it has meant greater centralisa- business units far greater autonomy in decision tion of the real estate function within the making. In more mature markets, the focus is region, and restructuring traditional CRE on building relationships with the business and teams to better serve companies’ changing other internal stakeholders, taking on a larger needs. A centralised function also benefits CRM role, but it is critical to note that, in the cor­poration in allowing for a holistic less-mature markets, it is incumbent on CRE view of its portfolio, supporting questions of professionals to build strong relationships with which locations offer the best talent and external stakeholders such as developers and incentives for their business. Occupiers are , as well as to gain the support of the also recognising that very different skill sets legal and other tertiary professionals who are required to visualise and drive ‘planning ensure the smooth delivery of projects. and strategy’ for real estate as compared to delivery and operational issues, and there is a Reactive to proactive shift to separate these roles to ensure maxi- The goal of the CRE function is not just mum expertise in both spheres. It is no lon- being able to respond to an immediate busi- ger about a single transaction, but actively ness need, but to actively engage with the seeking not only to deliver greater value to business on a continuous basis and bring the business, but also to bring ideas and opportunities for them to consider as well as innovation to the table. plan around risk mitigation of the portfolio. The two ends of the spectrum on the The last 3–4 years have seen the emergence of value curve for CRE have been the IT&T strong account management teams by service sector at one end of the scale and the manu- providers in the region, in anticipation of pro- facturing sector at the other end (Figure 4). active portfolio optimisation by occupiers, and today there are many CRE teams plan- Telecommunications and technology ning strategies 2–3 years in advance of expiry IT&T has been the pack leader with most events, taking advantage of market and companies having a centralised CRE func- situations where possible, and constantly tion globally and regionally. The focus of reviewing the portfolio. these real estate teams is on speed to mar- ket, adapting to technological changes that affect its business model and further opti- THE FUTURE: THE VALUE CURVE misation of its portfolio. Workplaces for The real estate industry has seen a shift in the these firms tend to play a big part in the key operating models, varying from ad hoc to a considerations of employee attraction and single source; however, the tide seems to be retention.

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Figure 4 Where corporations are positioned today Source: Cushman & Wakefield

Manufacturing/fast-moving consumer CONCLUSION goods/pharmaceuticals The purpose of this paper has been to high- This sector has been a relatively late entrant light the evolution, challenges and ways in to the world of outsourcing, with some which the CRE function as well as the pro- exceptions, and several well-known house- fessionals within that function are moving up hold brands have started their journey and the value chain to influence and guide deci- are continuously improving their models to sions objectively. At the top end of the spec- suit their companies’ objectives. The trend of trum there have been efforts made by some outsourcing follows the change in the CRE companies whereby the real estate function organisation and can range from a single- operates with profit and loss (P&L) account- source supplier to a hybrid of panel suppliers ability, truly accounting for the optimum use to ensure best-in-class local service delivery. of every square foot of real estate held by the A key challenge is educating the business on company. Siemens is one of the few com­ the benefits of moving to a centralised ­system panies to have carved out Siemens Real from a decentralised one. Many of these Estate as a separate P&L account centre. companies have been in these countries for There are other companies, like Unilever, decades and often operate like a local firm. GE and Pfizer, which have strived to move Very often they have been the pioneers in up the value curve by bringing their global these markets and local operations have dealt real estate assets under a single control func- directly with real estate matters themselves. tion supporting the business. This move has

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provided a key opportunity to step-change References the management of their portfolios, shifting (1) Soumya Ranjan, Senior Associate, FICCI-EY from supporting to owning and driving (2013) India Real Estate report, ‘EY and ambition with a clearly defined vision to pro- FICCI report on “Brave New World for vide best-in-class management of real estate. India Real Estate” ’, chapter on ‘Indian real Clearly there is no ‘one size fits all’ strategy estate: the year gone by and outlook’, for managing the real estate portfolio­ and publisher: [email protected]. various organisations continue to choose the (2) International Monetary Fund, IMF country models that best suit their organisational report no 14/235 (July 2014), Staff report for the 2014 article IV consultation, IMF, goals, within the context of the size of their Washington, DC. portfolio and geographical location.

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