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Australian Corporate Real Estate Trends

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Australia’s Corporate Real Estate Trends, Getting the Strategy Right, reveals that the Australian CRE’s see their mandate as stronger than three years ago – 26% say much stronger and 40% say stronger. Find out more at http://globalcretrends.jll.com/Australia.php

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Australian Corporate Real Estate Trends

  1. 1. AUSTRALIAN CRE SURVEY Getting the Strategy Right
  2. 2. Executive summary JLL’s Corporate Real Estate (CRE) survey has come to represent the voice of the industry, with our latest issue capturing the opinions of more than 500 global CRE executives. This Australian report shares the views of CRE executives operating locally and compares the results to their global and Asia Pacific counterparts. Based upon the results of the last five years, the CRE operating environment has greater transparency around real estate costs at the highest levels of the organisation as the C-suite (CEO, CFO, COO) demanded cost reduction strategies. 1Australian CRE Survey: Getting the Strategy Right Real estate rarely owned a permanent agenda item at the board level but this changed particularly since the GFC as companies honed in on what has typically been their second or third largest cost base. Yet the legacy of this paradigm shift is an unrelenting focus on cost at the expense of allowing CRE to create value beyond just financial savings. The demands of the C-suite are growing not slowing. Not only do the C-suite continue to demand cost savings from real estate but their expectation is for the CRE Executive to deliver on both the value and cost side of the real estate equation.
  3. 3. 2 For CRE Executives to elevate their role away from just a cost focus, they need to expose what they have regarded traditionally as ‘strategically’ sensitive functions to service providers. Entrusting asset and portfolio strategy to a service provider, will allow CRE to focus on stakeholder management and integration with the business and other supporting functions. This will help move CRE Executives from a technical specialist to a trusted advisor. To effectively engage with business stakeholders, CRE Executives need to be able to understand the strategic objectives at all levels of the organisation and apply them to corporate real estate strategy. More importantly, they need to demonstrate through appropriate performance metrics how real estate supports and is aligned to the business, as well as supporting growth and enhanced productivity. Encouragingly, gains are being made on the productivity front, with CRE executives challenging themselves to deliver productivity improvements, quantify them and communicate them to the C-suite. Yet the lever that most CRE teams pull to achieve productivity gains continues to be cost and only focussing on cost does not provide for long-term sustainable productivity outcomes. Driving productivity through other means will help move CRE from being ancillary to the business to being a catalyst for the business. Australian CRE Survey: Getting the Strategy Right
  4. 4. What has changed 3 The major shifts in CRE sentiment since the last JLL CRE survey have been captured in the following infographic. Australian CRE Survey: Getting the Strategy Right
  5. 5. The drive for productivity is gaining momentum 5 Productivity seems to be of increasing not lessening importance to the real estate function, with 77% of CRE executives in Australia stating that productivity has become a more important goal in the last two years. The real challenge is how to measure productivity improvements not just at the asset level, but right across the organisation and demonstrate how real estate initiatives have contributed to those productivity gains. Some companies are managing and measuring productivity improvements better than others. Our results show that documented productivity gains over the past two years are focused in the 6-10% range, but some CRE teams have achieved productivity gains of up to 15% over the same period. Other respondents indicated that productivity gains had been achieved but were unable to quantify those gains. Productivity is well entrenched in the business vernacular of corporate Australia and CRE has been part of the conversation. Australian CRE Survey: Getting the Strategy Right
  6. 6. 6 Figure 1: Increasing productivity
  7. 7. 7 Figure 2: How productivity gains have been achievedUnderstanding how productivity gains were achieved may provide valuable insights to other companies struggling to quantify the improvements. Not surprisingly, the most popular mechanism for delivering productivity gains was cost savings, nominated by 88% of respondents. If the cost of inputs are reduced, overall output or productivity increases. Workplace improvement was also seen as a key area for achieving productivity outcomes and allowed CREs to demonstrate productivity gains outside of just their traditional real estate remit. However, getting back to basics was also critical to underpinning productivity improvements with 72% of CREs nominating improved management of real estate. Here tactics such as the mapping of real estate delivery processes can enhance productivity. Delivery processes that are not defined limit the ability to understand property performance levels, eliminates improvement opportunities and clouds accountability. Clear delivery processes are critical to productivity improvements. Australian CRE Survey: Getting the Strategy Right
  8. 8. 8 Some anecdotal feedback was provided around how organisations had achieved productivity gains in the following key areas – finance, labour and real estate. Australian CRE Survey: Getting the Strategy Right
  9. 9. 9 Those CRE executives that are able to deliver productivity improvements beyond real estate and show how real estate has the potential to impact right across the organisation will rise to the top. At JLL we recognise there is no singular approach to productivity, however we believe there is a framework for approaching how an organisation can achieve productivity gains. Whilst there are a myriad of ways to define and measure productivity, the framework in Figure 3 helps in contextualising the multiple factors in four key areas: leadership, systems & processes, the work environment and people. We see leadership, systems & processes and the work environment as being the foundational enablers of productivity. Without these in place, an organisation will fail to achieve desired productivity outcomes. If an organisation only focuses on its people for productivity enhancement, the outcome will be short lived. To achieve sustainable productivity enhancement, the organisation must also address the foundational enablers concurrently. Figure 3: A productivity framework Leadership – People need purpose Having a clear leadership vision, purpose, direction and communication program will foster productivity in a business. Clearly stated objectives and productivity programs owned at the highest levels of the organisation will help to mobilise people to achieve productivity gains. It will also ensure that people know their purpose and understand how they contribute to the organisation’s performance, thus ensuring they feel valued and engaged. Systems & Processes – Giving back people their creative time Having the systems and processes in place to support people to achieve efficiency and productivity gains is another critical success factor. Investing in the right tools and technologies will reduce the administrative burden and give people back time to become more client-facing and allow time for collaboration and creativity to drive innovation and growth. Workplace – Signifies an investment in people The workplace is where CRE has made the greatest inroads to impacting organisational productivity, delivering workplaces that act as a catalyst for human performance. This is reflected in the results with 82% of CREs stating there is a high expectation from the organisation around improving workplace productivity (up from 74% two years ago). To ensure that the workplace does actually deliver these sought after productivity gains, companies need to understand what tasks teams perform that contribute the most value to the organisation, and how the effectiveness of these teams can be stimulated. Australian CRE Survey: Getting the Strategy Right
  10. 10. 10 Only then can they start to design and deliver the most appropriate physical environment to support these tasks. This is borne out in the data, with an increasing proportion of businesses asking CRE to focus on change management initiatives (81%) and implementing workplace technology (81%). Figure 4: Workplace productivity expectations trap of putting all their focus on people first, without addressing the other key foundational enablers covered earlier. In this knowledge age, people are largely the drivers of productivity, however it is hardest to draw the direct causal link between people and productivity gains. People motivation and performance is a subjective, intangible measure which differs not only from organisation to organisation, but between departments and indeed between business leaders. We believe that if you have the three foundational enablers in place, this will give an organisation the right culture and build engagement with employees which will foster productivity success. The results of the survey support the thinking behind this framework. Figure 2 showed how organisations had achieved productivity gains over the past two years. Organisations are focussing on the foundational elements of the framework to deliver productivity gains, with 72% nominating workplace as a driver of productivity gains, 72% highlighting improvement management of real estate which falls into the systems & process category, as does technology systems nominated by 38%. 59% of respondents nominated management changes (ie leadership) as a means of delivering productivity improvements. People Fundamental to the achievement of productivity gains is clearly people, yet many organisations fall into the
  11. 11. Cost Isn’t going anywhere 11 As our previous surveys have highlighted, the GFC shone the spotlight on CRE and presented an opportunity for real estate to deliver up much needed savings to organisations. CRE executives globally did not falter and were up to the task, reducing occupancy costs when the business needed it most. As a result, this is the foundation upon which their reputation has been built and is the contribution that is most valued by the business. But the question needs to be asked, what else can be delivered to the business that will add value to the performance of the organisation? 56% of CREs stated that their real estate strategy has been more cost driven over the past two years, with 42% more value driven. These results are not surprising really as cost savings are easier to measure and communicate to the executive level of the organisation. As we have said in previous reports, it is far more difficult to prove a causal link between the real estate strategy to business performance and thus demonstrate the value creation side of corporate real estate. The survey results demonstrate an unwavering focus on cost and that the CRE mandate is inextricably linked to cost savings. Australian CRE Survey: Getting the Strategy Right
  12. 12. 12 Figure 5: Current focus of CRE strategy Figure 6: Change in CRE strategy focus over the past 2 years Australian CRE Survey: Getting the Strategy Right
  13. 13. 13 Figure 7: Attributes that could potentially elevate the CRE function Figure 8: Attributes that could elevate the CRE function Australia vs Global Further evidence of the cost agenda is that 35% of CRE executives believe delivering cost savings is the key to elevating the function of corporate real estate inside their organisations. What is perhaps more interesting is that in Australia, cost is perceived to be more critical to success than in other parts of the world. The variation could be attributed to the relative difference in maturity levels of the global real estate markets. Australia is further up the maturity curve than many other markets (in particular Asia), with CRE teams having already delivered much of the workplace strategies such as mobile and activity based working (ABW) and now the focus is delivering these solutions at a more optimal cost base. This is further underscored by the relative expense of the Australian commercial real estate market, where CBD rents are amongst the highest in the world, placing real estate as one of the most significant costs on a P&L. Any ability to reduce or impact this cost base is welcomed by the C-suite as it is an easier lever to pull than people costs. Australian CRE Survey: Getting the Strategy Right
  14. 14. Getting the strategy right 15 key business objectives of the organisation and how it contributes to the performance of the business, from a profitability, growth and customer experience perspective. Where many CRE teams fall down is only focussing at the asset or portfolio strategies, given the pressure from the business to save cost. Portfolio strategy The portfolio strategy layer is where organisational objectives are translated into a corporate real estate strategy so that CRE aligns with the business requirements. It involves rolling up or combining the individual asset performance into meaningful, measureable and manageable performance metrics at a portfolio level. Asset strategy This is the tactical layer of strategy, where real estate decisions are based on cost optimisation. Here the CRE team needs to measure and monitor asset performance and make decisions at the property level. This is an aspect of strategy that is easily outsourced to free up internal CRE resources to focus on strategic stakeholder management and integration with the business. Strategy can mean different things to different people and have different roles to play in different organisations. The trends coming out of the CRE survey highlight that real estate strategy is challenging to get right to enable delivery on both the value and cost side of the equation. But it is our view that they cannot be mutually exclusive and that CRE executives need to develop a strategy that both saves costs and generates value for the organisation. A deep dive into real estate strategy reveals a number of layers which require different skill sets yet together can be a powerful combination. The three major layers of strategy are stakeholder management, portfolio strategy and tactical asset strategy. Strategic stakeholder management What many consider the pinnacle of strategy is strategic stakeholder management that needs to involve engagement with the highest levels of leadership inside the organisation, not only with the C-suite but also with the business unit leadership. This is a facet of strategy that is typically owned by CRE Executives and is not outsourced. Here the CRE Executive needs to be able to demonstrate how CRE contributes or underpins the Australian CRE Survey: Getting the Strategy Right
  15. 15. 16 Figure 9: Layers of real estate strategy To have a real estate strategy that integrates with the business and achieve strategic stakeholder management, there needs to be a change in conversation. As we have seen, the majority of CRE executives have spent the past two years with a strategy focussed on cost savings and whilst that will garner support from the business, it is leaving a lot of value on the table. CRE executives need to stop talking in real estate and cost metrics and shift the conversation to business outcomes. Part of this shift will come through increasingly sophisticated data and scientific analysis and predictive analysis techniques to guide real estate decision making. Australian CRE Survey: Getting the Strategy Right
  16. 16. 17 Figure 10: CRE performance metrics hierarchy To effectively engage with business stakeholders and have a seat at the table, CRE needs to be able to translate the real estate metrics into strategic measures that capture the contribution to the company’s performance. Typically corporate objectives are focused in four key areas – profitability (revenue growth and cost reduction), customer (service, satisfaction, retention), people (productivity, talent attraction & retention) and growth (new markets, innovation, R&D). Whereas CRE objectives typically focus on at the asset, the portfolio, delivery or workplace. There is a disconnect. As an example, if CRE was seeking executive level support for a new workplace to drive productivity, efficiencies and improve collaboration, the value proposition must come back to the core business objectives or the corporate success factors. A business case that demonstrates the collaboration, productivity and long-term cost savings benefits with a corresponding investment requirement, will prompt the C-suite to weigh up the investment against other investment opportunities such as increasing remuneration or training budgets. However if the business case demonstrates the workplace can generate a quantifiable additional revenue or profit, the cost of the real estate investment becomes insignificant. The decision is not about the opportunity costs of the funds to build the workplace, rather it is about the lost opportunity of not achieving greater revenue and profits. Shifting the conversation from one centred around real estate metrics and outcomes to one of business performance and outcomes is the future of CRE. Australian CRE Survey: Getting the Strategy Right
  17. 17. 18 Figure 11: Changing demands of senior leadership alignment with firm’s strategic prioritiesAnother example relates back to one of the strategic priorities placed on CRE by the C-suite - bringing more flexibility to the leasehold portfolio to create on- demand space. Bringing flexibility to the portfolio is often a desirable real estate lever for corporates, but this comes at a cost. If the CRE team is presenting a business case that demonstrates the value of the flexibility balanced with the cost, there is a conflict. If the business case is able to demonstrate how the improved flexibility aligns with the objectives of the organisation and how CRE contributed to achieving these objectives, then the value creation will outweigh the additional cost for the increased flexibility. Leaving the conversation as a trade-off between cost and flexibility will never move CRE away from cost to value creation. Australian CRE Survey: Getting the Strategy Right
  18. 18. 19 Figure 12: Changing demands of senior leadership tactical delivery of CREDespite the challenges of demonstrating the value creation capability of corporate real estate, it is something that cannot be ignored. In fact the business is demanding that CRE do both – deliver cost savings but also drive business performance. Our results show that the C-suite is expecting CRE to demonstrate alignment with the firm’s strategic priorities but at the same time improvement in the tactical delivery of real estate services. It is those CRE leaders that can walk the tightrope between the two that will elevate their role and perceived value inside the organisation. Australian CRE Survey: Getting the Strategy Right
  19. 19. CRE team structure and delivery models 21 81% of respondents in Australia have an internal procurement function that participates in CRE decisions. This is higher than the global average of 70% and the rest of Asia Pacific at 69%. This higher incidence is in part due to the relative maturity of the Australian market and the prevalence of procurement as a strategic function in many organisations. Procurement in Australia has worked its way through most of the supporting business functions and shared services in corporates, with corporate real estate one of the remaining frontiers that is now attracting attention. A key trend to emerge since our last Global CRE survey around CRE team structure and delivery models is the ever increasing involvement of procurement in real estate decisions. Figure 13: Internal procurement function Australian CRE Survey: Getting the Strategy Right
  20. 20. 23 Figure 14: Position of global head of CRE The increasing involvement of procurement has potentially shifted the focus of outsourcing away from long-term, strategic partnerships to short- term and cost-driven solutions. The organisational make-up has also been affected, with CRE departments trending towards reporting into a shared services structure in Australia rather than directly into the C-suite. 57% of respondents said that CRE reported into the C-suite, compared to 69% two years ago. Only 26% of respondents said their global head of CRE sat in a dedicated real estate department compared with the global average of 31% and the rest of Asia Pacific at 40%. There was a higher incidence of the global head of real estate reporting into finance or a shared services function, which runs the risk of short-termism and decisions predicated on cost at the expense of value. However, the unwavering focus on cost control by procurement represents both a challenge and an opportunity for CRE. If CRE is able to get a strategy framework in place and demonstrate the value-add beyond cost savings to procurement (no mean feat in itself), they will have a powerful advocate when it comes to the presenting a business case to the C-suite.
  21. 21. 24 Figure 15: Attitudes toward outsourcing Considering real estate delivery models, 26% of all CREs in Australia view real estate outsourcing decisions as strategic and focused on long-term value. This is slightly higher than the global average of 22% and highlights the maturity and sophisticated of the real estate market in this country. CRE executives across the country are turning increasingly to outsourced providers to help meet the demands of the business. Only 14% of respondents view outsourcing as a tactical decision which is focused on achieving cost-savings compared to the global average of 25%. This points to the evolution of the Australian corporate real estate sector along the outsourcing continuum.
  22. 22. 25 Figure 16: Current delivery structure of CRE servicesThe survey results also show a trend towards a greater level of outsourcing in the future. Those functions that currently have the highest level of outsourcing are facilities management (36% fully outsourced and only 8% managed fully in-house), project & construction management (33% fully outsourced), transaction execution (32% fully outsourced) and lease administration (28% fully outsourced). Where CRE sees value in further levels of outsourcing over the next three years are most prevalent in transaction management & execution, lease administration and occupancy planning. Those disciplines that respondents are planning to keep largely in-house in three years time are portfolio strategy (8%), workplace strategy (8%) and change management (11%). Portfolio strategy is a bit of a misnomer, given the many layers of strategy. The strategic stakeholder management and integration with the business are components that are best managed internally by the CRE team. However, outsourced expertise around portfolio and asset strategy may combine with the strategic business knowledge to deliver a powerful real estate strategy. Australian CRE Survey: Getting the Strategy Right
  23. 23. CRE Performance gaps 27 Excellence in CRE is as much about people as it is about property. When ranking their performance on a number of critical success factors, CRE executives in Australia scored themselves lower than the global and Asia Pacific averages. We believe this is again due to the relative maturity of the Australian market. Whilst the rest of Asia Pacific is still scoring wins with CRE cost savings initiatives, many of these have already been captured in Australia. CRE in Australia is trying to move to the value creation side of the equation, which is a much more challenging proposition to achieve and hence the lower performance rankings. Respondents ranked themselves as weakest on having a comprehensive approach to gathering and promoting great ideas, as well as having a robust strategic planning function which is integrated with the enterprise. Interestingly the strategic planning function is the discipline most CRE teams score themselves as underperforming on, yet it has The majority of CRE executives surveyed felt that whilst the demands of the C-suite have been increasing, there has not been a corresponding investment in the CRE team to facilitate delivery against those expectations. Australian CRE Survey: Getting the Strategy Right
  24. 24. 28 one of the lowest levels of outsourcing with 42% of respondents delivering this completely in-house and this figure remaining at 39% in three years. A formal CRM (relationship management) program was also identified as lacking in many organisations, which is critical to being able to develop a real estate strategy that has direct impact on the business performance and outcomes. Where Australian respondents ranked themselves highly was on having a robust outsourcing strategy in place with 69% scoring themselves strongly or very strong on having an appropriate mix of internal and external resources. Yet it would seem there is a gap in terms of resources that are able to deliver the value-added skill sets that would help deliver a robust strategic planning function that is integrated with the enterprise, or a comprehensive approach to gathering ideas or integrating across the IT, HR, sourcing and finance groups. Reflecting back on the strategy discussion earlier, the resources available to the CRE executive are being focussed on the foundational elements of strategy which are concentrated on cost savings, rather on the more sophisticated elements of strategy such as strategic stakeholder management and integration with the business. Figure 17: CRE team performance Australian CRE Survey: Getting the Strategy Right
  25. 25. 29 The results indicate there is a gap between the expectations of the business and the ability of CRE teams to deliver against those expectations. Lack of investment stood out clearly as the main inhibitor to CRE delivering to business expectations, particularly in Australia where 58% of respondents named it as a key challenge. This was followed by a lack of integration to the wider business (47%) and a lack of sustained C-suite commitment (42%). These three constraints were most prevalent in Australia compared to the global average and the rest of Asia Pacific, as was a lack of technology. When asked what would help to close the delivery gap and elevate the role of the CRE, the most popular answer (35%) was delivering additional cost savings to the business. This was followed by generating insights to support the business (21%) and forward thinking (16%). This again underscores how deeply the mindset of CRE is entrenched in cost savings, a legacy issue from the GFC. Whilst cost savings will continue to be demanded by the business, CRE needs to educate on how real estate strategy can have material business impacts outside of cost savings and avoidance. Figure 18: CRE team performance – Regional differences Figure 19: Constraints of CRE Australian CRE Survey: Getting the Strategy Right
  26. 26. 30 Figure 20: How to elevate the CRE function
  27. 27. Future predictions 31Australian CRE Survey: Getting the Strategy Right
  28. 28. Conclusion 32 The good news is that the CRE see their mandate as stronger than three years ago – 26% say much stronger and 40% say stronger. But the question becomes how to elevate this mandate to be more far-reaching inside the organisation as well as just stronger from a real estate perspective? Particularly when there is such a big focus on cost savings and a belief that this will deliver much sought after productivity gains. CRE executives have told us that delivering cost savings is critical to enhancing their profile, connecting with the C-suite and is fundamentally easier to demonstrate. Yet delivering on this C-suite requirement for cost savings is labour intensive, leaving less time to focus on creating value for the organisation beyond financial savings. Delivering on the value side of the equation is harder, more intangible and more challenging to quantify. Yet it is those CRE teams who create a strategy that allows them to offer up productivity gains from both a cost savings and value creation perspective, who will elevate to excellence as we move through to 2020.
  29. 29. About the authors 33 Tony Wyllie is Head of Integrated Portfolio Services, Corporate Solutions at Jones Lang LaSalle. Tony works with real estate and facilities teams to drive real estate performance and align the property strategy to that of the business. Tony has more than 20 years experience in the corporate property services industry, delivering and implementing solutions around work place strategy, portfolio strategy, strategic sourcing, transactions and valuations and due diligence. Anna has more than 16 years experience in marketing, communications and research in the commercial and hotel property sectors. She is responsible for setting the marketing strategy and executing strategic programmes, including thought leadership, for the Corporate Solutions business in Australia. TONY WYLLIE National Head of Integrated Portfolio Services, Corporate Solutions tony.wyllie@ap.jll.com 61 2 9220 8729 ANNA TOWN Director, Strategic Sales Services, Corporate Solutions anna.town@ap.jll.com 02 9220 8445 Australian CRE Survey: Getting the Strategy Right
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  31. 31. www.jll.com.au

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