Real estate has been the main instrument of creating, maintaining and
transferring wealth for nobility and moneyed classes for centuries. In recent
years, institutional investment managers
have embraced real estate more than ever
due to its appreciation and cash-flow
potential. The asset class provides an
excellent counter balance to stocks, bonds
and other traditional investments.
“Fund managers are looking to increase
their exposure to real estate, primarily
because of the consistency of its cash
flows and the perception that its value fluctuates less than other investment classes,”
says Chris Decouflé, senior vice president
of capital markets for CB Richard Ellis, Inc.
Smart Business asked Decouflé a series
of questions to explore how ownership of
real estate can increase the value of a company:
Why is ownership of real estate so important?
Real estate often appreciates and can
provide significant tax benefits and its
value never goes to zero. While stocks have
the downside of potentially hitting zero,
real estate always has inherent value. If
you look at the demographics of the U.S.,
you have a growing population with some
interesting regional micro-trends. With a
key component of value being the relationship of supply to demand, the old maxim
‘they’re not making any more of it’ holds
true for real estate as an investment
Businesses can capitalize on real estate’s
wealth-building characteristics by owning
their own facilities. Over the long haul,
most firms find that real estate ownership
creates hidden shareholder value that can
be overlooked until a capital event looms.
Does the size of the company matter?
No. Small businesses can often be the
biggest beneficiaries of real estate ownership due to the relative illiquidity of their
underlying businesses. For example, a small accounting firm has minimal enterprise value other than the price for which it
could sell its client list. If this same firm
invested in an office building, in 20 years
the building likely would be worth far more
than the firm’s client list.
How about large companies?
With many companies being acquired for
their underlying real estate value (Toys ‘R’
Us, Albertsons, etc.), large companies are
finding that their real estate holdings can
make contributions to their bottom line.
Enlightened companies are performing
forensic real estate audits to identify value
and create strategies for their real estate
holdings. In many cases, shareholders can
realize large windfalls by identifying and
activating under-utilized or forgotten real
estate assets. Like every other asset of a
company, real estate should be reviewed to
see if it is providing the best long-term
return for shareholders.
Is enhancing the value the same as enhancing the cash flow?
No. Companies should first view real
estate as a tool for creating long-term
wealth. It is true that in certain situations
real estate ownership can be more favorable than leasing on a cash-flow basis
(especially on an after-tax basis).
Nevertheless, in most situations, owning
real estate will sap more cash flow than
leasing. The largest cash outlay is generally
the initial investment — typically no less
than 20 percent. If the equity component is
a barrier for a company, many institutions
and private equity sources are available to
furnish the equity for a preferred return,
which could run anywhere from 9 percent
to 15 percent in today’s market. Under this
scenario, the owner and investor split the
upside after an agreed-upon hold period.
How can real estate be a balance sheet tool?
When a company has a reasonable portfolio of real estate owned free and clear, it
has a balance sheet tool that can be used to
fund company initiatives, shareholder distributions and other company needs. The
untapped equity in these assets can be
tapped through sale, debt instrument, joint
venture recapitalization strategies and
other financial engineering. The level of
sophistication and liquidity in today’s real
estate market is unequaled. It is not an
overstatement to say this may be one of the
best times in history to be an owner of real
estate — provided the underlying fundamentals of your asset are solid.
CHRIS DECOUFL⊃ is senior vice president of capital markets
for CB Richard Ellis, Inc. Reach him at (404) 923-1224 or
[email protected].