1. PUBLIC SECTOR REAL ESTATE ASSET MANAGEMENT MODELS AND THEIR FINANCIAL EVALUATION: THE CASE OF ESTONIA Presentation at ERES 2013 20 th Annual Conference 3 rd -6 th July 2013 Kaia Kask University of Tartu

2. The aim of the paper The aim of the paper was to evaluate the financial impact of public sector real estate asset mana­ge­­ment (PREAM) models on state budget (SB) and government sector account (GSA), using the set of Estonian central govern­ment buildings as an example. 04.07.20132

3. Figure 1. The identification of the research objects. (Source: compiled by the author) State policy (real estate) Environment (general economy, real estate market) Space users (state employee) Management (PREAM) 04.07.20133

4. Figure 2. Conceptual change from property management concept towards corporate and public sector real estate asset management. (Compiled by the author) 01.07.20134 PM FM CREM PREM AM Real estate environment single object portfolio increase in number of objects passiv e proactive increase of strategic aspect Management strategy passive

5. Table 1. Similarities and differences between CREM and PREM. DifferencesSimilarities CREM The main focus is on return on investment. Juristictional difference on the operational level. The same conceptual aims, considering dilemmas between “owning-leasing” and “inhouse-outsource” management. Use the same levels of handling (mission, strategic, tactic and operational). Handling of different interests. An overlap on the operational level. PREM The main focus is on public and political goals. -e.g. the goal is to achieve both economic and social return on investment, which complicates the comparison of alternative investments. Problems with measuring the performance of real estate because of it´s unique character. 01.07.20135

6. Table 2. General basis for the PREAM models, based on the concept of CREM. Management (centralized, decentralized) Owning (centralized, decentralized) Leasing (cost-based, market-based) Inhouse 1. owned, managed itself 3. leased, managed itself Outsourced 2. owned, management outsourced 4. leased, management outsourced 04.07.20136

7. Research methodology Benefit-cost analysis (BCA), based on – cluster analysis (i.e., classified by general-purpose property and special-purpose property); – pro forma free cash flow estimation, forecasted at least for 30 years; – appropriate discount rate. Scenario analysis, based on – different views on real estate asset classification. Fiscal impact analysis (FIA), based on – state budget (SB) and government sector account (GSA). 04.07.20137

8. Table 3. General description of PREAM models. 04.07.20138

9. Table 4. An overview of the cost-based (CB), cost- based rental (CBR) and market-based rental (MBR) models. GPP – general-purpose property; SPP – special-purpose property 04.07.20139 Model 1Model 2Model 3Model 4 GPPCB MBR SPPCB CBR–

10. Data collection methods Indirect – economic macrodata forceasts – real estate market data from various databases – Ministry of Finance database (public sector buildings´ space data, based on asset inventory during Autumn 2009) – RKAS database (microdata) – benchmarks – expert opinion Direct – semi-structured interviews with real estate managers of Estonian ministries and other specialists 04.07.201310

11. The main indipendent input variables in PREAM models Income data: – sales revenue from asset disposition in result of space optimization, i.e. disposal of surplus property (in Model 2, 3 and 4) asset privatization (in Model 4) Cost data: – maintenance costs – periodical repair costs – capital expenditures – rental costs (both cost- and market-based rent structure) – costs of sales – cost of capital 04.07.201311

12. Figure 3. The real estate related cost structure in GSA in Estonia (EUR) (Source: Estonian Ministry of Finance) Light green – market rent; Dark green – side costs of the market rent; Light blue – maintenance costs; Dark blue – periodic capital expenditures; Red – one-time capital expenditures. 04.07.201312

13. Problems with market-based models Lack of information to get the exact numerical measurements for the input data to market-based models (market rentals, etc.). Adequate basis for the forecasting of market rent up to 30 years. The amount of the cash-flow to the government sector account (GSA) is heavily dependent on the size of the components of the market rent, which are not exactly measurable. It concerns basically only model 3, but because of that the two market- based models are not comparable with each other. 04.07.201313

14. Conclusions and discussions The concept of corporate real estate management (CREM) used in private sector is well-applicable also in public sector. The result of the benefit-cost analysis is heavily dependent on the quality of the input data to the PREAM models. The quality of data is dependant on the governmental information system in general, which is qradually improving. Currently, based on available input data, only cost-based models are comparable; it is not possible to compare cost-based and market-based models with each other. From cost-based models, model 3 is the most preferrable to implement, based on the analysis of Estonian public sector buildings. Final decision about the model preference for implementation should be made, based on single cases, not in aggregated form. 04.07.201314

15. Thank You for Your Attention! 04.07.201315