Impact of the Corporate Real Estate on Shareholder Value

The paper - based on a study which has been carried out by ARTHUR ANDERSEN and the EUROPEAN BUSINESS SCHOOL ñ demonstrates that the shareholder value concept is a relevant tool for strategic and operative management of corporate groups and companies in the real estate industry. This applies particularly to property divisions of corporate groups as they are all too frequently confronted with the same non-specific minimum return requirements that are expected of other areas of business as well. In this way, value-enhancing strategic decisions in the real estate sector can be made with regard to the return/risk ratio prevalent in this sector. However, the theoretically and practically predominating methods cannot be adopted for the real estate sector without first being modified. In order to adapt the shareholder value models to suit property companies or divisions, the following parts of the calculation must be modified: Determination of cash flows; Consideration of taxes; Determination of the detailed projection period; Calculation of the residual value; Attribution to debt and equity; Computation of the cost of capital. // When computing the cost of equity as a part of the cost of capital using the ìCapital Asset Pricing Model (CAPM)î, particular attention is paid to calculating beta factors. Beta factors represent the individual risk of an investment. Our empirical investigation of the beta factors of property companies in Germany, the USA, the U.K. and a number of other European countries yield values below 1. Beta factors of less than 1 mean that the individual risk of an investment in property companies is lower than that of an investment in a (hypothetical) portfolio encompassing the stock market as a whole. Looking at the minimum return requirements in the property divisions of corporate groups, these empirical findings indicate that the minimum return requirements for real estate must be set below those of other business areas. Here, we advice setting differentiated hurdle rates. The range of shareholder value instruments put together in this study allows the value-enhancing potential of various corporate and business area strategies in the real estate sector to be pinpointed.