18 th Annual ERES Conference Eindhoven, 15 th -18 th June 2011 Real estate as company asset – the study of chosen branches of the Polish market dr Rafał Wolski dr Magdalena Załęczna

Real estate in company Appropriate use of assets can increase profitability of company, however, inadequate management of assets could lead to insolvency. Real estate has some advantages and disadvantages from the point of view of the manager. – Some advantages: operational function, investment function, collateral for loans, lease-back, Wolski R., Załęczna M., Real estate as company asset... 2

Real estate in company Some disadvantages: high costs, location risk, special knowledge about the real estate market mechanisms Wolski R., Załęczna M., Real estate as company asset... 3

Real estate in company The functioning of the company requires the surface typical for the industry. In addition to the function of operating area, real estate may also take the role of investment or inventory (Henzel 2004). The first function – operational - is the most obvious and creates the traditional and specific perception of real estate as the factor of production, fixed cost (Gale, Case, 1989). Wolski R., Załęczna M., Real estate as company asset... 4

Real estate in company Some managers and owners of company treat the real estate as an investment, they expect income in the form of rents or fees and increase of the value of the real estate. The results of their effort depend on their knowledge of the mechanisms of the real estate market, particularities of real estate. Wolski R., Załęczna M., Real estate as company asset... 5

Real estate in company Taken decision should be in line with the strategic objectives of the company, activities should be based on the deliberated tools (Duckworth, 1993). In the United States in the 1980s began the process of restructuring of the real estate held by companies. The practical discipline of Corporate Real Estate Management was developed. The objectives were: to reduce the cost and exploit the potential of real estate (Laposa, Charlton, 2001). The outcome of this process was to reduce the value and quantity of property owned by companies. Wolski R., Załęczna M., Real estate as company asset... 6

Real estate in company In Western Europe these processes have started later and are visible now. There is possible to enumerate some strategies relating to real property used by the company (Nourse, Roulac 1993; Ali et al. 2008). Wolski R., Załęczna M., Real estate as company asset... 7

Real estate in company These strategies are focused on: – the lowest cost of used surface, – flexibility in adaptation to the needs of the workers, – the promotion marketing, – sales promotion, – facilitation of production, – facilities in management and – the greatest value of real estate. Wolski R., Załęczna M., Real estate as company asset... 8

Real estate in company in Poland The importance of real estate in resources of Polish companies is of great importance. Nowadays about 64% of gross value of fixed assets of companies are buildings and structures. Due to the previous socialist rules and transition there has been still a lack of a modern approach to real estate held by companies. Resources of such significant values should be strategically managed and used as a source of added value for companies. Wolski R., Załęczna M., Real estate as company asset... 9

Real estate in company in Poland On the basis of conducted studies it is visible that entrepreneurs see primarily the importance of operational function of real estate. The active management and facility management are quite new ideas for Polish managers. (Rymarzak 2009, Nowacki 2011), qualitative studies. Financial factors studies has been performed by authors on the fuel and energy industry companies (present on the stock exchange in Warsaw) for the period Wolski R., Załęczna M., Real estate as company asset... 10

Real estate in company in Poland The previous research gave the evidences that with the growing involvement of companies in tangible fixed assets, the liquidity decreased. The results would suggest that the companies from this branch do not make use of the potential lying in real estate as collateral. The authors wanted to verify this results in the other branches of Polish economy. Wolski R., Załęczna M., Real estate as company asset... 11

Real estate in company in Poland There are big differences among branches according to involvment in real estate, the was the reason authors chose transportation and storage and real estate activities to analyse – see table 1. Wolski R., Załęczna M., Real estate as company asset... 12

Wolski R., Załęczna M., Real estate as company asset Transportation and storageReal estate activities Investment outlays for building and structures as % of total investment outlays Gross value of fixed assets for building and structures as % of total gross value of fixed assets Investment outlays for building and structures as % of total investment outlays Gross value of fixed assets for building and structures as % of total gross value of fixed assets ,172,282,298, ,868,078,495, ,471,878,792, ,871,857,386, ,684,396,998,7

Real estate in company in Poland The authors decided to conduct analysis of balance sheets of companies referring to real estate as a part of fixed assets and long term investments. The authors focused on the question how involvement in the real estate affects the level of liquidity of enterprises. For the analysis the classic indicators of liquidity were used: Current Ratio, Quick Ratio and Acid Test. Wolski R., Załęczna M., Real estate as company asset... 14

Data In order to carry out the study a database of 815 companies operating on Polish market recorded by Notoria database was examined. On this basis seven companies in the transportation and storage sector and sixteen companies from the sector of real estate activities were identified. The 32 balance sheets for the transportation and storage sector and 92 balance sheets for real estate activities sector were examined. The real estate activities sector includes companies from the field of construction, real estate development or property management. All balance sheets were supplemented with data on real estate investments. Wolski R., Załęczna M., Real estate as company asset... 15

Methodology To determine the involvement of enterprises in real estate the participation rate of real estate in total assets (ReA) was calculated. Then, this index was analyzed, along with indicators of liquidity: Current Ratio (CR), Quick Ratio (QR) and Acid Test (AT). Analysis proceeded with three stages. – The first analyzes the differences in the level of real estate involvement of companies from the transportation and storage sector and real estate activities sector. Wolski R., Załęczna M., Real estate as company asset... 16

Methodology – This was followed by aggregation of data. The time series of balance sheets set up into a group, portfolios of similar level of the share of real property in total assets. Balance sheets have been sorted in ascending order. After the allocation of balance sheets into portfolios ten observations were obtained. In every portfolio there were two to three balance sheets of transport companies and from seven to eight balance sheets in the case of real estate companies. For transport companies collected a total of 28 balance sheets, and 79 for the real estate activities companies. – The aggregated data were examined with use of the Pearson correlation and linear regression analysis. Wolski R., Załęczna M., Real estate as company asset... 17

Research results: The share of real estate in the assets of the transport companies was as an average of 28%, while in real estate activities companies was 10%. These results were a kind of a surprise. The authors expected that these relationships would be reversed. The possible explanation for this is the fact that CSO data comprise the whole economy and operators in section of transportation and storage and operators in section real estate activities. Probably there is a huge concentration of real estate involvement of some companies which were not in database. The another explanation can be seen in data from 2009 which are diffrent comparing to the data from previous years. Wolski R., Załęczna M., Real estate as company asset... 18

Research results: Pearson correlation analysis and linear regression analysis were performed. Contrary to the research hypothesis the correlation coefficients have negative signs in each of the cases. This means that always with increased involvement in the real estate companies experienced liquidity drop. What draws attention is the lack of statistical significance in all tests in group of real estate activities companies. Wolski R., Załęczna M., Real estate as company asset... 19

Conclusions: Regression and correlation analysis carried out in two groups of companies: in the transportation and storage sector and real estate activities sector, did not show clearly the impact of property to the company's liquidity. However, the authors are tempted to claim that the real estate limits liquidity of companies, at least those related to transportation and storage companies. Wolski R., Załęczna M., Real estate as company asset... 20

Conclusions: There could be many reasons for this. The authors cannot clearly identify them, but one can speculate that financial managers cannot exploit the financial potential of real estate. They may not want to use mortgage. Wolski R., Załęczna M., Real estate as company asset... 21

Thank you for your attention dr Rafał Wolski dr Magdalena Załęczna Wolski R., Załęczna M., Real estate as company asset... 22