Using a System Dynamics Model for valuing Corporate Real Estate Strategies

Since Rappaportís publication (1) many studies have been published and much empirical research has been done to provide a deeper understanding on how companies can create superior long term value for their shareholders (2). In order to align internal goals with the maximization of shareholder value advocates of that approach claim to use economic value measures such as Economic Value added (EVA) or Cashflow Return on Investment (CFROI) as organizationís primary objectives (3), (4) thus insuring goal congruence between the principal and the agent. Management of Corporate Real Erstate as an important part of a Corporate Asset Management is expected to increase shareholder returns since optimization of the firms property positively affects future cashflows by highering revenues and lowering operational and capital costs as well as investments requirements (5). Some authors recently tried to define financial and operational ìproperty value driversî by identifying the specific actions or factors that cause property costs to arise or poperty revenues and investments to change (6). Specific strategies (e.g. outsourcing) and organizational designs (e.g. centralization of the firms property function) are suggested to achieve shareholder value objectives in that particular field. Prior research work is implicitely based on a simple linear structure of non financial value drivers that affect financial value drivers in order to interpret straightforward the shareholder value impact of different property strategies. However this shareholder value framework a) lacks in explicitly integrating external environmental factors such as property market features (office cycles, setting up strategies, size of the property markets, etc.) (7) b) fails in showing interactions among the independent contingent factors (e.g. size of the company, property value) and the dependent decision variables (e.g. scope of outsourcing, facility management), c) ignores dynamic aspects that are suppose to exist in a highly interdependent system and d) neglects stakeholders impact of any property strategy. Also all these previous aspects are not taken into account in standard textbooks on real estate management that are covering the valuation issue (8). Preceding arguments are giving rational to analyze the impact of the firm property strategy on value by using a dynamics system model based on Forresterís approach (9). The paper will be divided into three parts. The first part deals with the features of both the firm property environment and the commercial real estate markets. The second part presents the different variables to consider and the influences and interactions between them. Finally, we both try in the last part to examine the dynamic interrelated processes between property strategies and value implications using the system dynamics method and to offer suggestion for future research on this framework.