Real estate-related decisions in European cities

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

2. Research objectives Overview • 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 portionofpublicwealth in real estate • Lack of professional management in PREM, comparedto CREM • Municipalities lag behind PREM on stateleveland national level Decision-making in PREM Classification of public real estate Case studies Conclusions Need for more professional management in many municipalities

3. Methodology Overview • 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) Decision-making in PREM Classification of public real estate Case studies Conclusions

4. Decision-making Overview • Decisions in PREM… • shouldbeaimedatincreasingpublicvalue • reflect personal goalsaswellasorganizationalgoals • depend on the emotional and cognitive state of the decision-maker • are influenced by interest groups • … • Decision theories • Normative/economicdecision theory • Organizational decision theory • Descriptive/psychological decision theory • Political decision theory + PREM theory andpractice Decision-makingin PREM Classification of public real estate Case studies Conclusions all are relevant forPREM, no theory fully captures reality

5. Development and trends in PREM Overview • 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 Decision-makingin PREM Classification of public real estate Case studies Conclusions

6. Current managerial topics in municipal real estate management Overview Examples: • Strategy • Formulatingcleargoalsandstrategy • 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 Decision-makingin PREM Classification of public real estate Case studies Conclusions

7. Classifying public real estate Overview • 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/commercialor 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 Decision-makingin PREM Classification of public real estate Case studies Conclusions

8. Typical classifications for municipal real estate used in selected European countries Overview Decision-makingin PREM Classification of public real estate Case studies Conclusions

9. Selected cities Overview Decision-makingin PREM Classification of public real estate Case studies Conclusions

10. Real estatemanagement in Gdansk- Situation - Overview • 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 Decision-makingin PREM Classification of public real estate Case studies Conclusions

11. Real estatemanagement in Gdansk- Real estatestrategy - Overview • 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" Decision-makingin PREM Classification of public real estate Case studies Conclusions

12. Real estatemanagement in Gdansk- Real estateorganization - Overview • 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-makingin PREM Classification of public real estate Case studies Conclusions

13. Real estatemanagement in Gdansk- Formal and informal decision-making- Overview • 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 Decision-makingin PREM Classification of public real estate Case studies Conclusions

14. Real estatemanagement in Jena- Situation - Overview • 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 Decision-makingin PREM Classification of public real estate Case studies Conclusions

15. Real estatemanagement in Jena- Situation - Overview • 2001: decision to merge the real estate activities from 11 departments in one entity: “KommunaleImmobilien Jena” (KIJ) • 2003: KIJ commenced operations; in ordertoobtainthenecessaryfunds, thecitysold 94% ofitssharesofthemunicipalhousingcompanytoitswholly-ownedpublicutilitycompany; civilservantstransferedto KIJ (latermoreandmore real estateexpertswerehired) • Major changesatthebeginning: • recordingof all real estateholdings transparency, databasisfordecisions • transferofthelandlordfunctiontoKIJ  decisionsby real estateexperts, appropriaterents • introductionof a contemporaryaccountingregime balancesheet, P & L, depreciation, budgeting • Today: solid economic situationof KIJ, attractivedividendsforthecityeachyear, refurbishment backlog almost gone Decision-makingin PREM Classification of public real estate Case studies Conclusions

16. Real estatemanagement in Jena- Real estatestrategy - Overview • KIJ‘smission : „Creatingvaluesforthecityandforthepeoplewho live here” • Central goal: renovationandthuspreservationofthebuilding stock • KIJ viewsitselfas “a commercially-run, value-oriented ‘one-stop serviceprovider’ andthecentralcontactfor all residential, commercialandinternalusers” ofthemunicipalproperties • Furthermore KIJ offersrelocationservices, ownsandoperatesthecompleteinformationandcommunicationtechnologyforthepublicbuildings, andmanagesJena’sdebt • Most conflicts are solvedbytheprice: responsibilityof KIJ todemand a cost-covereringrent, responsibilityofthecitycounciltoallocateenoughincometothepublicentities (e.g., a school) topaythatrent • Strong consensusamongthepoliticalparties on themostimportanttasksof KIJ; less agreement on some operational issues such as landmanagement Decision-makingin PREM Classification of public real estate Case studies Conclusions

17. Real estatemanagement in Jena- Real estateorganization - Overview • KIJ as independent REM unit with four bodies: city council (» stockholders’ meeting), supervisory committee, mayor (= formal boss of KIJ’s employees) Decision-makingin PREM Classification of public real estate Case studies Conclusions

18. Real estatemanagement in Jena- Real estateorganization - Overview • 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-makingin PREM Classification of public real estate Case studies Conclusions

19. Real estatemanagement in Jena- Formal and informal decision-making- Overview • Decision-making at KIJ was described by most interviewees as relatively informal and objective • Characteristics: • High importance of oral communication  relevant informationispassedmoredirectlyandallows a quicker decision comparedto a typical urban administration • Clear planning (business plan, medium-term planswithspecificgoalsandmeasures) • Clear divisionoflabor (thecitysetsthegeneralguidelinesandleavesoperationstoKIJ)  undueinfluencebypoliticiansandmembersoftheadministrationisbeingprevented • Involvement of the public indirectly—via the city council—and sometimes directly—via meetings, surveys, andjuries • Informal instruments (e.g., brainstorming) and formal instruments (e.g., web-basedinformationtool, CAFM system) are used to support the day-to-day tasks; no specific decision support system yet Decision-makingin PREM Classification of public real estate Case studies Conclusions

20. Someconclusions Overview • Study showsthediversityofapproachesto PREM; asoftoday there is no universal model • Best practicecitiesmanyyearsaheadofthemajority • 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 Decision-makingin PREM Classification of public real estate Case studies Conclusions

21. Contact Information 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 MalgorzataRymarzak mrymarzak@wzr.pl