IFMA Holland held its first public meeting in March 2000. During this meeting, it became clear what this new professional association for the Netherlands stands for international orientation in the field and concrete information transfer. A report of the latter in particular.
Stevens has encountered an increasingly critical stance where real estate is at issue. This critical stance is taken by both users and owners of office buildings alike. The price/performance ratio is an aspect that is specifically focused on. He furthermore observes a growing interest in real estate and the accompanying need from management boards for information that might contribute to a more pure determination of its production cost and return. Information that may contribute to the realisation of possible cuts on expenditure, the increase of the return on real estate and the improvement of an organisation’s performance.
Why would you want to measure the return on real estate?
‘Lately, many organisations have been faced with the question: are we going to invest in real estate or are we going to rent? When you are investing, you want to know its return. In the case of a lease term of 10 years or more, you do not even need to conduct an analysis. In such cases, it is always cheaper to buy than to rent, whichever way you look at it. Furthermore, you want to check whether users receive quality for the rent they are paying that is in accordance with the market. Finally, the insight into the return on a property can have an effect on future decisions.
Determining the return on real estate is interesting not only for the owners of office buildings but for the users as well. In it, users strive after an optimum contribution of the accommodation to the profitability of the company, and the accommodation expenses are among the largest facility cost items of a company. The owner of course is interested in the return on the investment.
In this respect, users are interested in the proper place of establishment, whether there is sufficient floor area, or some measure of flexibility (how to cancel the lease), and in the functional and spatial requirements. As opposed to that, the owner is specifically interested in the proper market location. He wants the property to comply with the demand with respect to surface area and quality, and he wants such a level of flexibility that there is a minimum vacancy. The attention areas of users and owners seem identical, but the accents differ.
“It is impossible to have one single figure as the result of the calculation. The result always consists of a band width, since the calculation includes several assumptions.” (René Stevens)
Within the world of property, several definitions are used to determine the return. In the Internal Rate of Return (IRR) method, at issue is the internal interest rate over the entire cash flow schedule. The Total Rate of Return (TRR) method is a return calculation over a specific period. This method offers some opportunities to manipulate the outcome.
The Gross Initial Return (GIR) method is used in brokers’ circles. It is the return over the gross rent of the first year. Yet another method is called Administrative Return (AR). It is identical to the TRR, including bookkeeping depreciations. It is an inaccurate method since reservations have already been incorporated in the TRR.
Read more in the Dutch article ‘Bepalen van het Rendement van Vastgoed‘ published in the Facto Magazine. (20000501 Facto Magazine – René P.M. Stevens MSc Arch/MBA). For an English translation ” Determining the Return on Property ” send us an email.