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Remove the constraints raise the bar: German Corporate Real Estate trends

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  • 1. Remove the constraints, raise the bar German Corporate Real Estate Trends 2013
  • 2. 2 German Corporate Real Estate Trends 2013 These increasing demands are leading to a faster-paced evolution of CRE outsourcing. Extended and complex demands on in-house CRE teams are driving rapid growth in CRE outsourcing across more geographies, functions and corporations. Risk: Procurement processes can undervalue the strategic contributions of external partners. Expectations and pressures on CRE are building; heightening the risk of underperformance. Leadership pressure demands action at both tactical and strategic levels. CRE teams are being challenged to impact and add value to a wider range of agenda items. Risk: Perception of CRE team underperformance if a step change is not realised. Trend 2Trend 1 54 123 Corporate Real Estate (CRE) in context: Global trends Last year JLL issued findings from its 2nd Biennial Global Corporate Real Estate Trends Report, entitled Risks Ahead. This report was shaped by the viewpoints and perspectives of more than 600 Corporate Real Estate (CRE) professionals from across the world and from a wide group of industry sectors. As such it provided the most comprehensive and clearest interpretation of the issues and factors shaping the evolution of CRE ever assembled. The report pointed to five key trends and five associated risks determining the direction and development of CRE across the world:
  • 3. JLL 3 Workplace transformation is the key to unlocking worker productivity and portfolio optimisation. Embracing new work styles and implementing supportive new workplaces has been a strategic vision, if not immediate intention, for years. This is changing rapidly. Risk: Failure to invest enough in workplace to fulfil strategic potential of transformation. Trend 3 RE must become a collaborative agent. A greater focus on workplace transformation calls for a cultural shift within the CRE team. CRE teams need to become adept at working across the organisation and positioning themselves as agents and managers of change across shared services. Risk: CRE could lose influence and standing if not able to position for and influence wider strategy. Trend 4 Failure to deliver in emerging markets will become one of CRE’s greatest reputational risks. The CRE function remains tasked to deliver operational platforms in select growth markets. These markets will be central to driving corporate competitiveness. Risk: Great potential to damage CRE reputation through delivery failure in opaque markets Trend 5 Each of these trends and risks will equally impact on CRE in Germany. Yet, the depth of our research also allows a more granular interpretation of the specific factors shaping the CRE profession within Germany. The remainder of this report draws upon responses obtained from almost 60 CRE professionals based in Germany and either overseeing CRE for German corporations or the German operations of multi-national corporations. In so doing, it highlights 5 additional observations specific to German CRE.
  • 4. 4 German Corporate Real Estate Trends 2013 German Corporate Real Estate Trends: 5 additional observations
  • 5. JLL 5 Trend 1 »» There is a simple fact emerging from the responses received from German CRE professionals. They operate at a global level. Across our total respondent pool just less than a third (32%) operated with a global remit or sphere of influence. In comparison, more than half (53%) of our German respondent pool were focused at the global scale. Even when compared to respondents from the EMEA region (42%) this trend continues. »» But there is a limiting factor. While a world view tends to shape the day to day operations of German CRE teams, structurally there is a deficiency. Just 63% of German respondents function within a team that has a dedicated global CRE leader. This compares unfavourably to both the regional (82%) or global (86%) respondent pool. It is even more marked when compared to respondents drawn from other countries. More than 90% of respondents drawn from the UK or the USA have a dedicated global CRE leader. Form does not follow function: German CRE professionals are influential and active on a global scale but typically suffer from a weak global mandate or operating framework. Form does not follow function: German CRE professionals are influential and active on a global scale but typically suffer from a weak global mandate or operating framework. 32% 42% 53% 86% 82% 63% % of respondents with a global sphere of influence/remit % of respondents with a global dedicated CRE leader »» This is a fundamental challenge to the impact of CRE teams in Germany. Whilst they operate with a global gaze they do so without an overarching control structure and, one assumes, a lack of the global strategic context that originates from a dedicated CRE lead. This can promote fragmentation in thinking and action and act as a blocker to internal best practice exchange or internal communication of impact. Indeed 27% of respondents viewed a fragmented or decentralised CRE team as a constraint on the evolution of the CRE function. Global EMEA Germany
  • 6. 6 German Corporate Real Estate Trends 2013 Trend 2 »» A further structural challenge for German CRE teams relates to the engagement with senior corporate leaders or the C-suite. On first viewing the signs are positive. 71% of German respondents reporting hard-line into the CEO, CFO, COO or CIO. This is significantly higher than in the case of EMEA (60%) or global (58%) respondents. It suggests that the general global trend of CRE becoming acknowledged as an issue of strategic significance is more advanced in Germany than in other parts of the world. »» This trend is vital to drive the CRE function to a more progressive, internally challenging and value added position. Senior connection is required to shift the focus from being an internal and tactical order taker and moving it towards being a strategic order maker. It is also important in exposing the CRE function directly to senior demands. As our global survey illustrated, these demands are multiple, intensifying and combine traditional tactical and strategic requirements. »» So on first glance it would appear that German CRE teams have the right level of senior engagement and as a result a strong mandate to act. But do they? 39% of German respondents placed the lack of sustained or consistent c-suite commitment as they key constraint in CRE rising to the challenge of being a strategic function that adds value to their enterprise. In fact this was ranked as the #2 constraint after a lack of finance. When compared to the global respondent pool CRE buy-in was ranked as the 3rd constraint and was flagged by 32% of our total respondents. It is clear that for German CRE teams to raise the bar much work needs to be done in transforming a hard reporting line structure into a strong and sustained inter-relationship that connects CRE to strategy and decision making; ensures that the CRE strategy is aligned and achievable with the resources available; and creates a dialogue about transformation and evolution that is grounded in reality. Proximity to the c-suite is not fully leveraged: Despite a hard reporting line into the C-suite few CRE teams feel sufficiently empowered to act strategically as an ‘order maker rather than order taker’. Proximity to the c-suite is not fully leveraged: Despite a hard reporting line into the C-suite few CRE teams feel sufficiently empowered to act strategically as an ‘order maker rather than order taker’. % of global heads of CRE reporting to the C-suite Global EMEA Germany % of respondents placing lack of C-suite commitment as a top constraint hindering CRE from enhancing itself as a strategic value to the organization 58% 32% 39%34% 71% 60%
  • 7. JLL 7 Trend 3 »» This dialogue needs to be firmly focused around preparedness for a future transformation and, accordingly, about skills. While fewer German CRE professionals position themselves as ill-equipped for the rising challenges being placed upon them currently (4% compared to 7% globally), they are acutely aware of a need for new skills to build a stronger position. 21% of German respondents saw the internal skills set / knowledge base as an impediment to the growth and evolution of the CRE mandate. Most obvious here is actually a behavioural trait of being more forward thinking and challenging of the orthodoxy. 30% of German respondents ranked this as the #1 skills requirement for CRE, compared with 22% globally. This ability to challenge has to come from strong and secure internal relationships which as noted above are not there. There is also a clear requirement to build and apply stronger inter-personal skills to manage more senior and strategic engagement and build the required c-suite relationships. Finally, there is a more elementary need – and one that has clearly developed across the globe in the 2 years since our inaugural global real estate survey in 2011. Building stronger data sets and analytical tools that enable effective decision making and capture value add is an additional skills requirement for CRE. The gap in CRE soft skills is widening and damaging capability: German CRE will be less about technical property skills and more about stakeholder management and communication skills. Currently these skills are sparse. German CRE do not recognize the need of soft skills at all Key requirements of CRE-teams Global EMEA Germany Providing data and insights 12% 18% 19% Forward thinking / challenging status quo 22% 24% 30% Focused on innovation 8% 7% 7% Business acumen / understanding of broader business 17% 9% 9% Improving internal reputation of CRE 5% 4% 2% Improving CRE team communication / relationship skills 3% 3% 0% Adding new skills (eg change management, financial acumen, leadership skills etc) 4% 7% 0% Presenting real estate options & scenarios 20% 18% 23% Efficient stakeholder management outside CRE 8% 10% 11%
  • 8. 8 German Corporate Real Estate Trends 2013 Trend 4 »» A central theme of our global survey is the rising pressure being placed upon CRE teams. This has driven a clear and unmistakable growth of CRE outsourcing. Globally only 8% of our survey respondents perform all CRE functions in-house compared with over 20% back in 2011. This trend is clear across continental Europe despite a historical resistance or reluctance. What is significant however is that how the rationale for and relationship with an outsourced CRE partner is perceived. German respondents are ahead of the global trend here. None of our respondents, when asked to place attitudes to outsourcing on a continuum, positioned outsourcing as a purely tactical transaction with the lowest cost supplier. 6% of our global respondents did. Furthermore 65% of German respondents placed outsourcing at the top end of our continuum which sees outsourcing as a strategic partnership based relationship focused on value add. »» Yet there is a paradox. Despite this strategic perception of outsourcing, despite evidence pointing towards a greater adoption of outsourced relationships, there remains a comparatively strong tendency towards self-performance in German CRE. For example, 26% of German respondents undertake transactional activity fully in-house presently. 17% of the same respondents believe they will still be doing so in the next 3 years. It is the same for Lease Administration – important given the importance being placed on data and analytics. 60% of German respondents are performing Lease Administration tasks in-house and almost 50% believe they will still be doing so in 2016. »» On the flip-side there is a move towards outsourcing evident over the next 3 years but it is by no means dramatic. 15% of German respondents believe they will be fully outsourcing transaction services in three years, up from 8% presently, while project management outsourcing is estimated to remain flat with just 2% fully outsourcing in this area now or in the future. This is a concern. Whilst understanding some of the anxieties around outsourcing, the stark reality is the emerging CRE agenda when coupled with little investment in internal CRE resources or budgets points to a real necessity to explore and execute the outsourcing opportunity. If this is not done, then the impact of the CRE team will be constrained by capacity. There is strong recognition of outsourcing as a strategic pursuit, yet a culture of self- performance persists within German CRE: Despite rising pressure, a resultant growth of CRE outsourcing, and skills challenges many active within German CRE continue to self-perform – vicious circle.
  • 9. JLL 9 CRE outsourcing is increasingly seen as a strategic imperative Current attitudes toward outsourcing Currently Three years from now 42% 60% 36% 30% 49% 23% % of respondents performing lease admin fully in-house Currently Three years from now 22% 26%26% 18% 17%17% % of respondents performing transaction services fully in-house There is strong recognition of outsourcing as a strategic pursuit, yet a culture of self-performance persists within German CRE Global EMEA Germany Outsourcing represents a tactical transaction, mainly with the lowest cost supplier Outsourcing represents a strategic relationship, where I assess longer term value add with a partner 7% of respondents in Germany said they do not outsource 6% 9% 21% 33% 30% 0% 9% 19% 35% 30% Germany Global
  • 10. 10 German Corporate Real Estate Trends 2013 »» Impact will be further constrained if CRE teams continue to operate in silos. This was a major finding of our global survey published in April. As real estate shifts in perception from being a simple factor of production to a facilitator of productivity, it becomes an industry wide concern. As such real estate decisions need to be taken with full support, agreement and understanding from HR, IT and finance teams. If they are not, then operational and financial risks are likely. Both our global and German respondent pool shows that this collaboration with other support functions is a present day reality but only a sporadic, project by project basis. Around a third of German respondents have ad hoc project based collaboration with HR and finance teams, and more than a half engage on a similar basis with IT. Yet three years from now this adhoc collaboration persists amongst German respondents when compared to our global respondent pool, particularly in terms Disconnected CRE teams will struggle to impact: As real estate becomes a facilitator of productivity, stronger and sustained collaboration with other internal functions, such as HR, is not a nice to have it is an imperative. Trend 5 of HR and IT collaboration. That is not to say that German CRE teams do not envisage a shift towards more structured and formal collaboration with other functions through shared-services model. They do and often to a greater extent than the global respondents. What this points to is greater polarisation on collaboration models. It is our firm view that those that shift quickly and positively towards more formal collaboration are more prepared for the future. It is time to break-down the silos and become what we refer to as a collaborative change agent. German CRE should intensify their collaboration with HR HR IT CRE Finance 21% of German CRE do not have any interaction with HR
  • 11. JLL 11 Where next for German CRE? So what are the implications of our survey findings on the CRE market in Germany? Having been operating in the market from more than a decade, I am inclined to make four key observations. »» The development of the occupier real estate market in Germany in regards to processes, competencies, governance etc. has been traditionally shaped more by evolution than revolution. This needs to change; fast. In reality the market requires bold and strong leaders motivated and capable of accelerating development and transformation. Change must come from the top. »» Do not under-estimate the impact of culture. National and corporate culture is a far more powerful influence than we tend to accept. In particular, if you compare the given lifetime of a firm or the sector in which that firm operates, or if you look at the individual ‘make or buy’ equation. But culture is not necessarily a static phenomenon. If the corporate culture would better embrace ‘learning’ as an ingredient part of its DNA, then the CRE team will certainly benefit by looking at and being open to ‘best in class’ solutions in their sector and their marketplace. »» Soft skills need to enter the environment. While the professionalism of CRE teams and leaders has increased significantly over the last decade, there remains a consistent absence of change management competencies; first class communication skills; strong stakeholder engagement attributes and / or leadership mind-sets. Outside of the collaboration areas identified within the survey this is one area that the corporate HR function can assist the development of CREM. Stronger profiling of future leaders with a greater emphasis placed on soft skills rather than merely professional competencies is required if the opportunity of transformation is seized and optimised. »» All of these points link back to one basic and fundamental point that requires urgent attention. The weak and most often fragmented mandate for the CREM function needs to be overturned. As our survey has ably illustrated, a direct reporting line in to the C-suite does not in itself guarantee the required level of influence or leverage at the right points on the critical path of decision making to ensure that corporate real estate decisions are effective, efficient or enhance productivity. German CRE leaders are operating at a global scale – a reflection of the export orientation of German industry. It would seem to me mandatory that the C-Suite empowers its real estate managers at the global scale. But typically they do not. This has to change. »» How can this change? I acknowledge it is not easy as evidence by the evolution of the last decade. To drive a faster pace of change in German CREM there will need to be an increased capability to make strong, strategically critical arguments, supported by first class data, compelling business cases which are communicated with flair, passion and brilliance to bring the c-suite on board. It’s a tall order. It’s a challenge that isn’t going to disappear. Ralf Heuser Head of Corporate Solutions Germany
  • 12. Contacts: www.jll.co.uk Ralf Heuser Head of Corporate Solutions Germany +49 69 2003 1204 ralf.heuser@eu.jll.com Lee Elliott Head of EMEA Research +44 20 3147 1206 lee.elliott@eu.jll.com

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