The Public Wealth of Cities by Dag Detter

Author:Dag Detter
Language: eng
Format: epub
Publisher: Brookings Institution Press

DEVELOPING THE REAL ESTATE PORTFOLIO AND MAXIMIZING VALUE

Proper accounting is the prerequisite to maximizing value of both operational and real estate assets.

With operational assets it is first of all important to benchmark the operational and financial efficiency with private sector peers to better understand the performance gap with the best-in-class. Second, proper accounting allows the government to optimize the capital structure and set up a relevant dividend policy, in line with its private sector competitors. Third, through business development it will maintain the focus on the core business and invest only when profitable. This has proved to be an important strategy, as government-owned operations tend to become unwieldy conglomerates with a poor allocation of capital and overburdened by non-core assets. The reason that government-owned enterprises end up a hoarders of assets with poor return on capital is partly because they can only raise additional equity through a very painstaking political process in which their commercial requirement for additional capital will compete with the need for social spending and other public welfare requirements. Consequently, leaders of government-owned enterprises are incentivized to minimize earnings in order to avoid paying dividends altogether. To be sure, there are endless ways to show a loss and avoid paying dividends, including diversifying and making investments regardless of whether they will give a positive return or not and then cross-subsidizing within the group. The result is that public enterprises often end up as ill-defined and opaque operations with poor return on capital and wasteful capital allocation.

In the context of publicly owned real estate, value maximization can be achieved through a similar process making the best use of each asset and the portfolio as a whole, through a process starting with commercialization and optimization, and ultimately with a potential rationalization. Commercialization requires that a comprehensive business plan assess all assets, including assets that are unused, used by third parties, or directly used in the provision of public services, but that can either be relocated to more cost-effective and beneficial locations, or used to generate ancillary income, such as through additional or alternative use of the property.

A second focus should be optimization of economies of scale to be achieved across the entire portfolio, as well as with each real estate segment, not just maximization of yield from each individual asset.

Third, rationalization assumes a professional capacity to develop assets to reach their best use and potential. Developing a portfolio also requires the skill of determining which assets have reached maturity, meaning that they have reached a fair value, and therefore can be sold in order to use the proceeds to reinvest in assets that are capable of yielding a higher return. Mature assets could be disposed of at the relevant point in the market cycle, as part of the broader business plan for maximization of yield across the entire portfolio, but not in isolation as this could lead to similar destruction of value as in a fire sale. Monies generated from rationalization of activities should first be made available as

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