The Leader Magazine

MAR 2019

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Therefore, before assessing the risk, it is important to understand the strategic goals of the company and how these will be impacted by an increasingly volatile or unpredictable environment. If these conversations aren't already happening, helping put together a team that can address the situation is essential. This group should consist of members from the C-suite, trade compliance, risk, human resources, supply chain, procurement, finance and tax, and logistics. This will help you analyse potential risks, impact on costs and operational disruptions. 2) Stand back and see the bigger picture With a clear understanding of the strategic goals and with input from across the business, it is very important to establish the groundwork to really assess how a volatile environment could impact the business and the underlying real estate. If new tariffs are implemented, it is worth mapping import activity. Which countries will the tariffs impact and how likely is that going to affect your business? New tariffs could require making adjustments to the supply chain, and re-evaluating the overall strategy could have a knock-on effect on real estate. Your company may have to assess other suppliers and consider multiple sourcing origins to mitigate the impact. Trade disputes could potentially have an impact on your target markets, consumers, and expansion plans. Depending on your sector, changes in tariffs could lead to a direct increase in costs, but it is also important to be aware of a potential increase in non-tariff costs as countries' responses could escalate rapidly. These could mean more inspections and slower customs practices and conformity assessments. Outside of the tariff and trade environment, what other geopolitical risks could have an impact on the supply chain and how might this change? Looking at the issues more broadly will help identify whether a deteriorating situation could affect your business in other ways. As the existing and potential risks become apparent, it is important to run the scenarios and identify which markets are most at risk and how this fits in with the real estate portfolio. One approach could then be to designate facilities in these markets as 'core' and 'non-core', allowing you to adjust real estate and financial strategies for each category. With sufficient data in hand, including data from around the business, CRE leaders can take concrete steps to ensure that they have the processes and protocols in place to fully inform real estate decisions at a time of stress or unpredictability. 3) Identify cost savings Following the diagnosis, a smart first step is to focus on assessing whether there are any opportunities to introduce cost-saving measures. For example, in the markets most affected, running an analysis to identify and eliminate space in your current portfolio that is under- used and reviewing whether a consolidation of premises could bring efficiencies will help trim costs. Conducting a "mark-to-market" rental exercise for those facilities affected will help identify ways to restructure your lease terms to more favorable ones due to market conditions or changes in the strength, standing or position of the landlord. This is especially true where potential trade tariffs are having an impact on demand for commercial real estate and rents are under pressure. In general, benchmarking your operational costs against peer companies to identify and mirror the best-in-class is a sensible move. It could also be worth going out again to look for economic incentives from public entities for any new facilities or any new tax incentives affecting real estate or operations; they might counterbalance the impact of tariffs. 4) Keep the network flexible Keeping the real estate network flexible is essential during a period of volatility. This can be viewed both in terms of the facility's workspaces as well as location. In terms of workspace, non-traditional workspaces, such as co-working space or hot-desking, have been shown to improve productivity at a higher level of utilisation and density. In terms of location, if market conditions are projected to remain unfavourable, then there may be cause to exit a market quickly. Essential to this will be designing an efficient process or playbook for CRE teams, enabling them to make faster decisions on all facility leases or sales. Depending on the local market, some additional flexibility could be freed up by looking at owner-occupied premises and considering a sale and leaseback scenario. Not only could this free up capital; it could also build in further flexibility going forward. Carrying out a valuation of any owned assets would be an important step in understanding and potentially unlocking value. Other measures to enhance flexibility include exercising short-term lease extensions, and postponing space relocations and improvements. In a volatile tariff environment, when looking at serious locational restructuring, it is important to start thinking as early as possible, visualising various scenarios and analysing real estate options in other markets. Closing facilities or offices in many markets can be a challenging task, given legal hurdles, local labour laws, and potentially difficult real estate disposal. Therefore, thinking early will be essential to build in the possibility of flexibility. 5) Review capital expenditure If there is capital expenditure that involves investing heavily in a market, consider whether sinking costs into an affected market is the right thing to do. Indeed, with the ongoing uncertainty, many companies may cancel or put investment decisions on hold until the situation stabilises. Having a firm grip of the capital plan, reviewing the expenditure and prioritising future projects given the potential changes will be important. From a real estate perspective, delaying a property purchase, expansion, refurbishment or improvement is a sensible holding strategy until the uncertainty subsides, though this has to be balanced with the impact on business operations of scaling back any previously planned capital expenditure. It could be the case that any new tariffs could accelerate the need for additional facilities. If your approach is to shift inventory into different markets before a new set of tariffs come in, then investing in new real estate to support this strategy could be an appropriate response. Careful planning is key The world today feels like an increasingly volatile place, and with real estate portfolios increasingly spread across markets where tensions are being felt, CRE and the people that manage it will be an integral part of any risk- mitigation strategy. Knowing the importance of sticking close to the business strategy, understanding the stakes, planning ahead, and running the right scenarios will help insulate your business against some of these risks. Nicholas Holt is the Asia Pacific Head of Research for Knight Frank. the leader March 2019 35

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