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Real estate-related decisions in European cities by Carsten Lausberg, Anna Wojewnik-Filipkowska and Małgorzata Rymarzak prepared for the 20th Annual Conference.

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Presentation on theme: "Real estate-related decisions in European cities by Carsten Lausberg, Anna Wojewnik-Filipkowska and Małgorzata Rymarzak prepared for the 20th Annual Conference."— Presentation transcript:

1 Real estate-related decisions in European cities by Carsten Lausberg, Anna Wojewnik-Filipkowska and Małgorzata Rymarzak prepared for the 20th Annual Conference of the European Real Estate Society, July 3-6, 2013 in Vienna OUTLINE Decision-making in PREM Classification of public real estate Case studies Conclusions Overview

2 © Lausberg/Wojewnik-Filipkowska//Rymarzak 2013, p. 2 Decision-making in PREM Classification of public real estate Case studies Conclusions Overview Research objectives Objectives of this paper -To identify problems in the decision-making processes of municipal real estate management (REM) units -To derive possible solutions from best practice Part of two larger research projects which aim at … -improving decision-making in real estate management  Lausberg -improving public real estate management (PREM)  Wojewnik-Filipkowska/Rymarzak Justification -High portion of public wealth in real estate -Lack of professional management in PREM, compared to CREM -Municipalities lag behind PREM on state level and national level Need for more professional management in many municipalities

3 © Lausberg/Wojewnik-Filipkowska//Rymarzak 2013, p. 3 Decision-making in PREM Classification of public real estate Case studies Conclusions Overview Methodology Analysis of the current literature, including studies by consulting firms Case studies -Accepted method of qualitative research -Principle of triangulation Shows the richness and complexity of human behavior by studying a subject from more than one viewpoint Assures objectivity (“looking at a mountain from three sides”) Data/method/time/observer/theory/space/levels triangulation -In-depth analysis, mainly by interviews (with mayors, real estate managers, politicians, school principals, facility managers, residents, journalists…), but also by data analysis Selected cities -Gdansk, Rotterdam, Jena  in this paper -Several other German cities (e.g., Hannover, Friedrichshafen)

4 Decision-making Decisions in PREM… -should be aimed at increasing public value -reflect personal goals as well as organizational goals -depend on the emotional and cognitive state of the decision-maker -are influenced by interest groups -…-… Decision theories -Normative/economic decision theory -Organizational decision theory -Descriptive/psychological decision theory -Political decision theory +PREM theory and practice © Lausberg/Wojewnik-Filipkowska//Rymarzak 2013, p. 4 Decision-making in PREM Classification of public real estate Case studies Conclusions Overview all are relevant for PREM, no theory fully captures reality

5 Development and trends in PREM First steps to professionalization of PREM in the 1990s; influenced by new public management (NPM) and CREM At the same time public real estate became a subject for academic and other research (e.g., by ULI, RICS, consultancies, government authorities); selected works: Audit Commission (1988), Roberts/Basile (1990), Simons (1992), Gibson (1994), Byrne (1994), Moore (1997), Straßheimer (1998), Deakin (1999), Kaganova/Nayyar-Stone (2000), Kaganova/McKellar (2006), Fernholz/Morales/Fernholz (2007), Jones/White & RICS (2008), Phelps (2010), Deloitte (2011), White (2011), Kaganova (2012) In the 2000s increasing use of private sector practices, e.g., landlord- tenant-model, centralized REM units, and sale of surplus properties But in most European cities PREM is still restricted to providing property for the provision of public services – either by law (e.g., in Poland) or by incompetence/unwillingness © Lausberg/Wojewnik-Filipkowska//Rymarzak 2013, p. 5 Decision-making in PREM Classification of public real estate Case studies Conclusions Overview

6 Current managerial topics in municipal real estate management Current managerial topics in municipal real estate management Examples: Strategy -Formulating clear goals and strategy -Incorporating environmental criteria Portfolio -Collecting economic and financial data about the properties -Classifying the properties for various purposes Finance & investment -Appropriate definitions of value and return -Achieving cost transparency and economical use of resources Organization -Centralizing all real estate-related activities in one REM unit -Introducing a portfolio management system © Lausberg/Wojewnik-Filipkowska//Rymarzak 2013, p. 6 Decision-making in PREM Classification of public real estate Case studies Conclusions Overview

7 Classifying public real estate Proper classification is a prerequisite for strategic management and thus for creating value Currently the classification is often based on the legal and technical attributes, while ignoring the economic and financial side Classification criteria depend on the purpose (e.g., to organize the REM unit or to identify properties suitable for a sale-and-lease-back transaction), but also on traditions and regulations Criteria (according to Fernholz/Morales Fernholz (2007), Dent (1997), Kaganova (2012)): -structure (buildings/infrastructure/land) -usage (governmental/commercial or direct service properties/let properties/vacant properties) -necessity (necessary/not necessary for operations or mandatory/discretionary/surplus) -others, e.g., development potential, ownership, function, location, property characteristics, valuation © Lausberg/Wojewnik-Filipkowska//Rymarzak 2013, p. 7 Decision-making in PREM Classification of public real estate Case studies Conclusions Overview

8 Typical classifications for municipal real estate used in selected European countries © Lausberg/Wojewnik-Filipkowska//Rymarzak 2013, p. 8 Decision-making in PREM Classification of public real estate Case studies Conclusions Overview

9 Selected cities © Lausberg/Wojewnik-Filipkowska//Rymarzak 2013, p. 9 Decision-making in PREM Classification of public real estate Case studies Conclusions Overview RotterdamJenaGdansk Foundation1230 1224 Area206 km²114 km²262 km² Population City617,347105,463460,517 Metro1,211,523n/a1,080,700 PREM Foundation20062003n/a Properties3,7267557,751 Book Value€ 2.2 bn€ 0.3 bn Employees129170n/a

10 Real estate management in Gdansk - Situation - Gdansk is the major economic, scientific, and cultural center of the Pomeranian Province and the main port of Central and Eastern Europe Stable population, relatively low unemployment rate, many students, many small companies Old housing stock with poor technical condition and furnishing standard; approximately 70% require some renovation and approximately 5% qualify to be demolished Gross value of the 7,751 municipal properties (without infrastructure and vacant land): € 0.3 billion; 50% in education/sports/culture, 33% in housing Professional REM started with the Creditworthiness Enhancement Programme (CEP) by the European Bank of Reconstruction and Development; the project started in 2002 and covered many issues of city management, e.g., financial planning and property management © Lausberg/Wojewnik-Filipkowska//Rymarzak 2013, p. 10 Decision-making in PREM Classification of public real estate Case studies Conclusions Overview

11 Real estate management in Gdansk - Real estate strategy - The city has not yet implemented all the measures to organize real estate management in accordance with the CEP program; missing elements for example: -No central REM strategy -No classification of properties -Lack of quantitative data and IT support The city has no information on the market value of its assets Initiatives which were taken on the basis of the city development strategy and can indirectly improve real estate management: -"Sportive Gdansk" -"Gdansk My City" -"Gdansk—I live here" © Lausberg/Wojewnik-Filipkowska//Rymarzak 2013, p. 11 Decision-making in PREM Classification of public real estate Case studies Conclusions Overview

12 Real estate management in Gdansk - Real estate organization - No centralized REM unit; instead, real estate is managed by different departments (mainly treasury and municipal services) and by organizational units of the city administration (e.g., educational institutions, cultural institutions, health care facilities) Decision-making in PREM Classification of public real estate Case studies Conclusions Overview

13 Real estate management in Gdansk - Formal and informal decision-making - The mayor and the city council favor a planned development strategy The inhabitants may influence the decision-making process by participating in public consultations (open meetings for interested residents, closed meetings for experts or representatives of stakeholder groups, counselling points, seminars, surveys) Consultations are carried out mainly in situations of social distrust (e.g., construction of a waste incinerator) and investments that require direct involvement and support of residents (e.g., regeneration) Recruitment of real estate experts is difficult due to wage differences between the public and the private sector Decision-making by civil servants in a formalized, bureaucratic way; no workarounds, no short cuts; strict procedures to ensure transparency and avoid corruption No decision support system for managing real estate © Lausberg/Wojewnik-Filipkowska//Rymarzak 2013, p. 13 Decision-making in PREM Classification of public real estate Case studies Conclusions Overview

14 Real estate management in Jena - Situation - Located in the center of Germany with good traffic connections to the next large agglomerations Leipzig, Dresden, Frankfurt, Berlin Economy dominated by science and technology (three world-famous companies from the optical/glass industry, many small and medium- sized businesses, several research institutes, two universities) Growing population, relatively low unemployment rate Population growth was not expected in the 1990s, and especially schools were neglected, resulting in a refurbishment backlog of € 100 million in schools and € 50 million in other public buildings Impossible to raise the necessary capital—at least not by cutting costs, increasing revenues, incurring debts, or occasionally selling properties; instead, the city decided to awaken the entrepreneurial spirit and to change the traditional management structures by creating space for own decisions © Lausberg/Wojewnik-Filipkowska//Rymarzak 2013, p. 14 Decision-making in PREM Classification of public real estate Case studies Conclusions Overview

15 Real estate management in Jena - Situation - 2001: decision to merge the real estate activities from 11 departments in one entity: “Kommunale Immobilien Jena” (KIJ) 2003: KIJ commenced operations; in order to obtain the necessary funds, the city sold 94% of its shares of the municipal housing company to its wholly-owned public utility company; civil servants transfered to KIJ (later more and more real estate experts were hired) Major changes at the beginning: -recording of all real estate holdings  transparency, data basis for decisions -transfer of the landlord function to KIJ  decisions by real estate experts, appropriate rents -introduction of a contemporary accounting regime  balance sheet, P & L, depreciation, budgeting Today: solid economic situation of KIJ, attractive dividends for the city each year, refurbishment backlog almost gone © Lausberg/Wojewnik-Filipkowska//Rymarzak 2013, p. 15 Decision-making in PREM Classification of public real estate Case studies Conclusions Overview

16 Real estate management in Jena - Real estate strategy - KIJ‘s mission : „Creating values for the city and for the people who live here” Central goal: renovation and thus preservation of the building stock KIJ views itself as “a commercially-run, value-oriented ‘one-stop service provider’ and the central contact for all residential, commercial and internal users” of the municipal properties Furthermore KIJ offers relocation services, owns and operates the complete information and communication technology for the public buildings, and manages Jena’s debt Most conflicts are solved by the price: responsibility of KIJ to demand a cost-coverering rent, responsibility of the city council to allocate enough income to the public entities (e.g., a school) to pay that rent Strong consensus among the political parties on the most important tasks of KIJ; less agreement on some operational issues such as land management © Lausberg/Wojewnik-Filipkowska//Rymarzak 2013, p. 16 Decision-making in PREM Classification of public real estate Case studies Conclusions Overview

17 Real estate management in Jena - Real estate organization - KIJ as independent REM unit with four bodies: city council (  stockholders’ meeting), supervisory committee, mayor (= formal boss of KIJ’s employees) Decision-making in PREM Classification of public real estate Case studies Conclusions Overview

18 Real estate management in Jena - Real estate organization - Process of a school renovation as an example for the close interaction between KIJ and the city: Responsibility of the schools & sports building department of KIJ, but along the process the plans go back and forth between KIJ and the city, sometimes in a formal way (continuous line), sometimes in an informal way (dotted line). Decision-making in PREM Classification of public real estate Case studies Conclusions Overview

19 Real estate management in Jena - Formal and informal decision-making - Decision-making at KIJ was described by most interviewees as relatively informal and objective Characteristics: -High importance of oral communication  relevant information is passed more directly and allows a quicker decision compared to a typical urban administration -Clear planning (business plan, medium-term plans with specific goals and measures) -Clear division of labor (the city sets the general guidelines and leaves operations to KIJ)  undue influence by politicians and members of the administration is being prevented Involvement of the public indirectly—via the city council—and sometimes directly—via meetings, surveys, and juries Informal instruments (e.g., brainstorming) and formal instruments (e.g., web-based information tool, CAFM system) are used to support the day-to-day tasks; no specific decision support system yet © Lausberg/Wojewnik-Filipkowska//Rymarzak 2013, p. 19 Decision-making in PREM Classification of public real estate Case studies Conclusions Overview

20 Some conclusions Study shows the diversity of approaches to PREM; as of today there is no universal model Best practice cities many years ahead of the majority Good examples how to solve typical problems of PREM, such as classifying properties or reducing the influence of politicians on the decision-making process PREM has numerous benefits for local governments and can produce substantial financial gains Some areas need more research and development, for instance decision support systems for PREM © Lausberg/Wojewnik-Filipkowska//Rymarzak 2013, p. 20 Decision-making in PREM Classification of public real estate Case studies Conclusions Overview

21 Campus of Real Estate Nürtingen-Geislingen University Parkstr. 4 73312 Geislingen, Germany Dr Carsten Lausberg Professor of Real Estate Banking carsten.lausberg@hfwu.de University of Gdansk Faculty of Management Dept. of Real Estate and Investment ul. Armii Krajowej 101 81-824 Sopot, Poland Dr Anna Wojewnik-Filipkowska wojewnik@wzr.pl Dr Malgorzata Rymarzak mrymarzak@wzr.pl Contact Information


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