Commercial properties are some of the safest investment assets you can find. And yet, it is not always commercially reasonable to keep your portfolio as it is. Real estate businesses are perfectly aware of that, but other sector companies may also need to restructure their real estate portfolios. Bolesław Kołodziejczyk, Head of Research & Advisory at Cresa Poland, comments on real estate portfolio restructuring.

What is real estate portfolio restructuring about?

A real estate portfolio will comprise all properties being under a company’s direct or indirect control, that is those owned by a company, those held indirectly by a company as a shareholder, and those to which it has limited property rights or contractual rights under a lease agreement. It is therefore rather a broad concept and individual portfolio components may both bring financial gains and entail costs.

To put it simply, real estate portfolio restructuring consists in selling or putting to alternative uses those lands, buildings and rights that no longer support a business strategy and in buying or leasing new properties which would better serve the interests of a company and its core operations. It is always done with a view to achieving financial benefits, but they may be gained in various ways.

Directors may decide to restructure a real estate portfolio when a company:
- needs cash for other investments,
- wants to increase or decrease its equity,
- intends to cut down on long-term lease costs,
- is expanding and in need of more workspace,
- is undergoing centralisation or decentralisation,
- can see some potential in putting its properties to different uses,
- is venturing into a new trade, and
- becomes aware of changing shareholder expectations or market conditions.

When to do restructuring?

Specialist real estate companies use optimum tactics when it comes to restructuring. They keep their fingers on the pulse and make decisions as they go along to boost profits.

By contrast, outside the real estate sector, companies become aware of a need to restructure real estate portfolios once every few or more years. In addition, while focusing on core operations, directors of large and medium-sized enterprises sometimes have only a general idea of their real estate resources and value.

If not done a regular basis, analyses of real estate portfolios should be commissioned with a specialist firm every five or six years.

Restructuring activities

Restructuring should be preceded by a thorough stocktaking procedure and an in-depth analysis of business needs, expansion options and investment plans. To do this, company directors or owners should engage in close cooperation with an external advisor to develop a comprehensive restructuring plan that could include the following:

Sell non-essential properties. This applies to all properties that have been put out of use, fail to generate profits or cannot be reasonably and profitably redeveloped. It always makes good sense to have cash for investments or liability repayment.

Add value and sell. In some cases, relatively insignificant financial outlays will add considerable value to properties to be sold. These may include adding utility infrastructure to a plot of land, changing the status of a farm land (from agricultural to residential or other), obtaining zoning conditions or making a change to a zoning plan to ensure appropriate development options. Sometimes it even pays to upgrade and sell a property that is currently being used by a company but can be easily exchanged for a property attracting limited investor interest. Therefore companies invest in upgrading properties to sell them dearly and use sale proceeds to buy equally good assets cheaply.

Sell and leaseback. This operation will give you a cash injection, but will increase your costs in the long run. Caution is strongly advised, particularly following the changes to IFRS 16 which will eliminate many benefits of sale and leaseback transactions.

Become a passive shareholder. A company owning a land property could make an agreement with a developer to construct a co-owned building. Relatively few businesses engage in such cooperation that, however, may prove profitable to both parties.

Transfer to an SEZ. Companies operating within Special Economic Zones (SEZ) can sometimes apply for an additional state aid or long-term tax exemptions. While restructuring a real estate portfolio, it is advisable to consider whether moving a plant 100 km further away from its current location will bring considerable savings. Polish SEZ regulations are, however, about to change soon.

Acquire a property. Businesses in good financial standing, in particular, which have so far leased buildings for business operations could consider acquiring them from their owners or buying a property. This will help bring down costs and improve balance sheets in the long term. All that is needed is appropriate funds and a seller willing to sell a property.

Lease your property. Businesses with no specialist experience in leasing are generally unwilling to lease part of their properties to others. It is, however, an option worth considering, particularly where a real estate portfolio comprises properties that are currently not in use, but may be needed later.

How to go about restructuring?

Real estate portfolio restructuring is an advanced process that could yield major financial gains provided it is carefully planned and executed. The tangible effects should be expected after a year.

The first thing to do will be to prepare an analysis of a company’s market situation. It is also advisable to seek assistance of a professional who will deal with the restructuring process from A (assessment of a company’s real estate needs and current portfolio) to Z (negotiations leading to transaction closing).

What matters here is the technical expertise, in-depth market insight and analytical tools of those directly involved in a restructuring project.