CORPORATE REAL ESTATE AND PROFITABILITY

Abstract

Real estate is a common asset item in the balance sheets of companies. All companies, no matter their size, or industry they belong to, own a certain amount of real estate to carry out their daily operations. The extent to which different industries hold real estate varies according to their real estate requirements. The hotels and restaurants sector possess the highest average property asset intensity (PTTA) of 70.5%, while the transport/ storage/ communications sector has the lowest average PTTA of 19.4%. There is a strong negative correlation between profitability and property asset intensity. However, this finding proves to be statistically insignificant after accounting for various firm specific factors (capital structure, firm size, previous profitability) and industry effects. Firm size (LNMV) and previous profitability (ROA(t -i)) have a positive impact on current profits (ROA), while debt leverage (LTEQ or DR) is observed to dampen profits. The regression model applied on the industry level is not a generic one. It achieved a good fit of 0.817 for the multi-industry but is weak in explaining the profitability for the commerce sector. Similar results were obtained regardless of how data was segregated: by year, industry, or property asset intensity. PTTA, ROA, LTEQ, LNMV and ROA (t-n are significantly correlated. Interestingly, ROA and ROA (t .|) are at their highest levels when PTTA is high (80% to 100%), although there is generally an inverse relationship between the two. This goes to show that real estate does play a part in influencing profitability, especially if the proportion of real estate is high relative to total assets. As such, corporate real estate should be given the attention they deserve. An integrative and comprehensive corporate strategy will help firms to fully realize the potential of their CRE holdings.