Real estate corporations: the quest for value
| Pages | 23-35 |
| Date | 01 February 2002 |
| DOI | https://doi.org/10.1108/14635780210416246 |
| Published date | 01 February 2002 |
| Author | Joseph T.L. Ooi,Kim‐Hiang Liow |
| Subject Matter | Property management & built environment |
Academic papers:
Real estate
corporations
23
Journal of Property Investment &
Finance, Vol. 20 No. 1, 2002,
pp. 23-35. #MCB UP Limited,
1463-578X
DOI 10.1108/14635780210416246
ACADEMIC PAPERS
Real estate corporations: the
quest for value
Joseph T.L. Ooi and Kim-Hiang Liow
Department of Real Estate, National University of Singapore, Singapore
Keywords Property management, Real estate, Corportate strategy, Economics
Abstract This paper examines the implications of the corporation's quest for value and the
adoption of a new economic performance metric on real estate corporate strategies. The economic
profit of 19 Singapore property companies is computed. Overall, the results suggest that most
property companies failed to generate enough periodic income to cover their cost of capital. Hence,
the companies appear to be destroying rather than creating corporate wealth. The discussion also
highlights some reasons why economic valude added (EVA) tends to understate the true economic
performance of real estate, both as an investment and as a business unit.
1. Introduction
Although the ultimate goal of most corporations is to maximize their
shareholders wealth, the management may not always seek to do so due to
moral hazard problems (Jensen and Meckling, 1976). Following a growing
awareness of the problem of management opportunism, shareholders have
increasingly placed more pressure on the companies to create and maximize
wealth. Indeed, the proliferation of corporate restructuring, acquisitions and
mergers, share buybacks, asset divestments and securitization deals seen
recently have been motivated largely by the corporations' quest to add
shareholders value. Real estate corporations are not isolated from the pursuit to
create wealth. For example, the mission statement of Land Securities, the
largest property company in the UK, is to ``pursue attractive and increasing
returns for its shareholders''.
Parallel to this quest for value is the adoption of an alternative metric to
measure corporate performance such as the economic value added (EVA),
which is a trademark of the consulting firm Stern Stewart & Company.
Prominent companies that have adopted EVA include Coca-Cola, Monsanto,
Bausch & Lomb, and Toys ``R'' Us in the USA and Tate & Lyle, Diageo, and
Siemens, in Europe. Proponents of the EVA concept claimed that it is a superior
performance metric because it eliminates financial and accounting distortions
and provides a real measure of a company's success in creating shareholder
value. Applied to the business unit level, EVA is also claimed to provide a
powerful management tool for investors and corporate managers to identify
where value has been created or destroyed in a business organization. In
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The authors would like to acknowledge the feedback and constructive comments from the
anonymous referee and participants at the RICS Cutting Edge Conference in London, UK in
September 2000.
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