Offshoring strategies key to corporate real estate plans

Reducing real estate costs remains an objective for many corporate occupiers but the motive for it has changed from managing through a downturn to maintaining competitiveness in a growing market.

This, according to the results of Jones Lang LaSalle's fourth Corporate Real Estate Impact Survey (CREIS 4), has resulted in an increased focus on longer-term cost containment strategies to support the business.

According to the results, almost all corporates are looking to achieve cost savings in some areas of their portfolio, with over 80 per cent targeting savings of up to 10 per cent. This is consistent with recent surveys of US-based corporate real estates (CREs) where approximately 75 per cent of respondents were seeking the same level of total savings from their real estate portfolios.

In terms of cost reduction strategies, the most common tactic used is to reduce construction/fit-out costs (over 80 per cent), followed by use of alternative workplace strategies (48 per cent).

John Forrest, Managing Director, Corporate Solutions (Asia Pacific) at Jones Lang LaSalle says, "Even though business conditions remain positive in most parts of Asia, global pressures are driving prices down for many products and services. Companies are therefore seeking further cost reductions from their real estate portfolios to improve their competitive position and raise margins."

The report added that demand for space has increased in most markets over the past 12 months, with the strongest demand focused on the major Chinese cities of Shanghai and Beijing. Indian cities (including Bangalore, Mumbai, Delhi and Hyderabad) also remain in favour.

Among the more established markets, Seoul, Sydney and Bangkok recorded the strongest demand, reflecting an increase in white collar employment generated by X economic growth in these markets.

Looking ahead, the strongest demand for office space over the next 12 months will remain focussed on China, followed by cities in India. This is driven primarily by local economic expansion and these markets' continued appeal as offshoring destinations. China has also emerged as the favoured location for future demand of industrial real estate.

Of the respondents looking to increase industrial space, more than half (58 per cent) chose cities in China. This reflects a combination of the growth of offshoring (with China becoming more popular for R&D activities) as well as the continued interest in manufacturing to service the growing domestic market within China.

This, the report notes, is a result of a marked increase in offshoring activity over the past three years with half of the respondents to CREIS 4 indicating that they presently offshore activities to lower cost locations within Asia Pacific. This is broadly in line with the findings of the survey of US-based firms, which found that 58 per cent had already offshored some office activities.

As the offshoring market matures and skill levels of offshoring destinations increase, the range of activities that companies are looking to offshore is also increasing. CREIS 4 respondents noted that they were planning to increase the level of offshoring for back office processing, call centres, IT/software and R&D over the next three years.

In terms of preferred locations, India remains the prime target for Business Process Outsourcing and call centre activities while China continues to emerge as a major destination for R&D and software centres. The emergence of Tier III cities in India (e.g. Ahmedabad, Chandigarh, Kolkata, Indore and Nagpur) and new locations in China (e.g. Dalian, Wuhan, Xian and Chongqing) will keep these two countries at the forefront of the offshoring wave.

However, new locations across the Asia Pacific are expected to emerge in the longer term, possibly in Sri Lanka, Pakistan, Vietnam and islands outside of Luzon in the Philippines.

The renewed "focus on cost underpins many of the CRE strategies that are currently being implemented including offshoring activities to cheaper locations and implementing a wide range of alternative workplace strategies," adds Forrest.

The report commenting on this concept of alternative workplace strategies (AWS) says that the search to redefine the workplace and introduce AWS is playing an increasingly important role in the real estate strategies of many companies. While these strategies offer the potential for reduced real estate costs in the short to medium term, the long term impact may also include employee productivity and assistance in attracting and retaining staff.

The real estate consultancy firm added that more companies are adopting AWS initiatives, with the percentage of firms that allocate a dedicated work point for all their office-based staff expected to decline from 82 per cent to 69 per cent over the next three years. More than 25 per cent of respondents indicate that they are planning to have more staff than workstations within three years, compared to just 7 per cent three years ago.

Floor space per person has decreased over time, with 67 per cent of respondents planning to reduce their floor space per person further over the next three years and 41 per cent of respondents said that the major reason for introducing AWS within their organisations was to reduce costs, the report highlighted.

It added that almost 60 per cent of respondents quoted a range of other benefits as primary drivers of AWS, such as increased staff productivity, increased interaction between staff, increased innovation and change in corporate culture.

"For AWS to succeed, corporations need to recognise that different activities/functions require a blend of different types of AWS. There is no 'one size fits all' solution and resistance is likely to occur. AWS is a journey, not a one-off change and hence, it is important that prior to implementing them, corporations needs to have clear projections on investments and its returns and also consider how these strategies can help attract and retain talent and accommodate generational change in the workplace," said Forrest.