Location Strategies: International Site and Facility Planning as part of Corporate Strategies 3658424168, 9783658424169

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Thomas Glatte

Location Strategies International Site and Facility Planning as part of Corporate Strategies

Location Strategies

Thomas Glatte

Location Strategies International Site and Facility Planning as part of Corporate Strategies

Prof. Dr. Thomas Glatte Business & Media School Fresenius University of Applied Sciences Heidelberg, Baden-Württemberg, Germany

ISBN 978-3-658-42416-9 ISBN 978-3-658-42417-6  (eBook) https://doi.org/10.1007/978-3-658-42417-6 Translation from the German language edition: “Kompendium Standortstrategien für Unternehmensimmobilien” by Thomas Glatte, © Springer Fachmedien Wiesbaden GmbH 2017. Published by Springer Vieweg Wiesbaden. All Rights Reserved. © Springer Fachmedien Wiesbaden GmbH, ein Teil von Springer Nature 2024 This work is subject to copyright. All rights are reserved by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Fachmedien Wiesbaden GmbH, part of Springer Nature. The registered company address is: Abraham-Lincoln-Str. 46, 65189 Wiesbaden, Germany Paper in this product is recyclable.

Preface

When I took up my post as an expert in the then Department of Real Estate at BASF AG on May 4, 1998, one of the first documents I had on my desk was a so-called Site Selection Report. The report was compiled for the joint venture between BASF and SINOPEC in Nanjing, PR China, which was in preparation at the time. This project, which involved the preparation of the feasibility study, negotiation of the land contract, and supply and disposal contracts for the investment with a total project volume of US$ 2.9 billion, was to dominate the next three years of my professional life. Today, the joint venture is one of the great success stories for successful settlements and foreign investments of German companies, not only in China. Since that first day at work, the topic of location search and strategy has been my passion. Thanks to the Asian boom at the time, the project in Nanjing was followed by several other projects in China, Korea, and Southeast Asia. After moving to Group headquarters in 2005, I was given the opportunity to support the process of finding and establishing new industrial sites in other regions as well, particularly in Eastern Europe and the Middle East. I still feel great joy and some trepidation when a new site project is brought to my team. And it is still a great thirst for knowledge and a sense of adventure that drive me out into the world to get involved in such projects. The real estate business is a very local business. I appreciate it all the more that these projects take place in different locations all over the world, thus requiring not only professional but also considerable social and intercultural competence. Despite the common underlying structure, each project is somewhat different, due to the large number of influencing factors. Every time, therefore, a great willingness to learn is called for. This book was written as part of my teaching activities at the Institute for Construction Management at the Technical University of Dresden and at the Institute for Construction Economics at the University of Stuttgart. It can therefore be used as lecture notes at these institutes. Especially in the presentation of the methods and the case studies, there are several parallels and overlaps with my book Development of Corporate Real Estate (in German “Entwicklung betrieblicher Immobilien”, also published by Springer Vieweg), which is based on my lectures on project development at the V

VI

Preface

University of Mainz as well as at the European Institute for Postgraduate Education at the TU Dresden (EIPOS Dresden). However, that book covers the complete range of real estate project development. It can be applied to any type of real estate and is also strongly oriented towards the German real estate market. This book, Location Strategies, focuses explicitly on industrial location searches in an international environment. In this book, I have incorporated numerous findings from my professional activities in construction abroad, at Philipp Holzmann AG, and in international real estate management at BASF SE. The findings and results of my dissertation, which I wrote as part of my doctorate at the Technical University of Dresden some years ago, can also be found in several sections. Writing a technical book requires a supportive environment that includes inspiration, advice, and active support over a long period. I am grateful for the inspiration offered by Dr.-Ing. Ulrich Steffen (formerly of BASF SE), my former supervisor and mentor in my early years at BASF, and to the motivation provided by Prof. emer. Dr.-Ing. Rainer Schach (formerly of TU Dresden) regarding research, teaching, and publication. I would also like to thank my friends and colleagues Björn Christmann (Bayer Real Estate GmbH, Leverkusen) and Klaus Forkert MRICS (Forkert Chartered Surveyor, Dresden), who were again available to me as helpful and critical reviewers of this book. I would also like to thank the many colleagues who have accompanied me in my numerous projects. Project work is first and foremost teamwork. A project can therefore only be successful with a perfectly composed and collaborative team. I would also like to thank my former employer BASF SE for its support and approval of this publication. I also would like to thank Bernd Leinenbach who renders for many years English language translation support to my various publications, including this one. Finally, I would like to thank my wife Pia Glatte-Bast in particular. Without her forbearance and patience, as well as the partial renunciation of my valuable, scarce “spare” time, all of this would not be feasible. I hope that the practice-oriented reader, the researching scientist, and the students working with this book will find it helpful. If so, then the effort will have been worthwhile. Heidelberg March 2023

Prof. Dr. Thomas Glatte

Contents

1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 Some Introductory Thoughts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2 The Structure of This Book. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 1 3

2 The Basics of Corporate Real Estate Management. . . . . . . . . . . . . . . . . . . . . 2.1 Basics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 The Term “Corporate Real Estate” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 Conceptual Delimitations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3.1 Essential Real Estate vs. Non-Essential Real Estate. . . . . . . . . . 2.3.2 Industrial Real Estate and Corporate Real Estate . . . . . . . . . . . . 2.4 The Specific Characteristics of an Industrial Property . . . . . . . . . . . . . . . 2.5 Corporate and Real Estate Strategies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.6 The Marketability of Corporate Real Estate . . . . . . . . . . . . . . . . . . . . . . . 2.7 Time Availability of Corporate Real Estate. . . . . . . . . . . . . . . . . . . . . . . . 2.8 User Satisfaction and Productivity as Key Performance Indicators . . . . . 2.9 The Goals of Corporate Real Estate Management. . . . . . . . . . . . . . . . . . . 2.10 Corporates’ Real Estate Portfolios. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.10.1 The Size of Corporate Real Estate Portfolios . . . . . . . . . . . . . . . 2.10.2 The Composition of Corporate Real Estate Portfolios . . . . . . . .

5 5 6 8 8 8 9 11 13 16 17 17 19 19 19

3 The Basics of Project Development. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 Project Development—Conceptual Definition and Delimitation . . . . . . . 3.2 The Objective of Project Development. . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 The Project developer’s Environment and Role. . . . . . . . . . . . . . . . . . . . . 3.4 The Project Development Process. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.5 The Initial Phase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.5.1 Basics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.5.2 Possible Constellations of Project Triggers. . . . . . . . . . . . . . . . . 3.5.3 The Time Factor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

23 23 24 25 26 27 27 28 29

VII

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3.6

The Conceptualization Phase. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.6.1 Basics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.6.2 Market and Competition Analysis. . . . . . . . . . . . . . . . . . . . . . . . 3.6.3 Site Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.6.4 Analysis of the Production Concept . . . . . . . . . . . . . . . . . . . . . . 3.6.5 Risk Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.6.6 Profitability Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Concretization Phase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.7.1 Basics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.7.2 Building and Operating Permits . . . . . . . . . . . . . . . . . . . . . . . . . 3.7.3 Engineering Planning Steps. . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Importance of Project Development in Industrial Companies. . . . . .

30 30 32 33 34 38 44 45 45 46 46 47

4 The Basics of Industrial Location Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1 The Term Location. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 The Development of Location Theories . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3 Location Strategy Concepts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4 International Market Entry. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4.1 Market Entry Approaches for Industrial Companies. . . . . . . . . . 4.4.2 Case Study: Market Entry in the People’s Republic of China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.5 Site Favorability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.6 Types of Location Factors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.6.1 Basics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.6.2 Objective and Subjective Location Factors. . . . . . . . . . . . . . . . . 4.6.3 Once-Off and Continuously Acting Location Factors. . . . . . . . . 4.6.4 The Operational and Functional Location Factors . . . . . . . . . . . 4.6.5 Push and Pull Factors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.6.6 The Quantitative and Qualitative Location Factors. . . . . . . . . . . 4.6.7 Quantity-Related and Value-Related Location Factors. . . . . . . . 4.6.8 Macro-Location Factors and Micro-Location Factors. . . . . . . . . 4.6.9 Case Study: Chemical Company BASF SE. . . . . . . . . . . . . . . . .

51 51 51 53 55 55

5 The Location Criteria for Corporate Real Estate. . . . . . . . . . . . . . . . . . . . . . 5.1 Basics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2 Obtaining Information Relevant to the Analysis. . . . . . . . . . . . . . . . . . . . 5.2.1 Framework Conditions for Obtaining Information. . . . . . . . . . . 5.2.2 Sources of Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2.3 Case Study: Industrial Parks in the People’s Republic of China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3 Key Manufacturing Location Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . .

75 75 76 76 78

3.7

3.8

56 57 59 59 59 60 60 64 65 68 68 70

79 81

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5.4

IX

The Macro-Location Factors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4.1 Market Centrality. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4.2 Location References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4.3 Political and Ethical Framework Conditions. . . . . . . . . . . . . . . . 5.4.4 The Legal System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4.5 The Financial, Tax and Customs System. . . . . . . . . . . . . . . . . . . 5.4.6 The Socio-Economic Framework Conditions. . . . . . . . . . . . . . . 5.4.7 The Socio-Cultural Framework Conditions. . . . . . . . . . . . . . . . . 5.4.8 Climatic Conditions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4.9 Site-Critical Natural Events. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Micro-Location Factors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.5.1 The Location of the Site . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.5.2 Site References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.5.3 Controlled Settlement Promotion . . . . . . . . . . . . . . . . . . . . . . . . 5.5.4 Potential Environmental Influences. . . . . . . . . . . . . . . . . . . . . . . 5.5.5 Availability of Area. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.5.6 The Nature of the Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.5.7 Land Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.5.8 Urban Land Use Planning and Building Legislation. . . . . . . . . . 5.5.9 Infrastructure Connections. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.5.10 External Development (Supra-Local Infrastructure Facilities). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.5.11 Inner Development. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.5.12 Internal Infrastructure Distribution. . . . . . . . . . . . . . . . . . . . . . . 5.5.13 Economic Aspects of a Property. . . . . . . . . . . . . . . . . . . . . . . . . 5.5.14 The Land Price via the Residual Value . . . . . . . . . . . . . . . . . . . . 5.5.15 The Land Price via the Comparative Value. . . . . . . . . . . . . . . . .

81 81 85 87 89 90 91 91 92 93 94 94 95 97 99 106 110 113 123 128

6 The Location Determination Methods for Corporate Real Estate. . . . . . . . . 6.1 Basics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2 The Systematics of the Methods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3 Ordinal Values. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4 The Qualitative Methods. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4.1 Setting of Standards. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4.2 The Checklist. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4.3 The Pairwise Comparison. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4.4 The Preference Matrix. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4.5 The Classification Tree . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.5 The Quantitative Methods. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.5.1 Overview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.5.2 The Utility Value Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.5.3 Rating as a Special Form of Utility Value Analysis. . . . . . . . . . .

147 147 148 149 150 150 151 153 154 158 162 162 162 167

5.5

131 135 141 141 143 145

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6.5.4 The Cost–benefit Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.5.5 The Cost-Effectiveness Analysis. . . . . . . . . . . . . . . . . . . . . . . . . Two Complementary Methods. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.6.1 The Sensitivity Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.6.2 The Scenario Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

171 175 179 179 180

7 The Site Assessment Process for Corporate Real Estate. . . . . . . . . . . . . . . . . 7.1 Basics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.2 The Time Factor of a Location Determination . . . . . . . . . . . . . . . . . . . . . 7.3 The Process of Location Determination . . . . . . . . . . . . . . . . . . . . . . . . . . 7.4 The Phases of Location Determination. . . . . . . . . . . . . . . . . . . . . . . . . . . 7.4.1 Subphase 1: Establishment of the Project Organization. . . . . . . 7.4.2 Subphase 2: Basic Definition. . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.4.3 Subphase 3: Regional Delimitation. . . . . . . . . . . . . . . . . . . . . . . 7.4.4 Subphase 4: Regional Screening. . . . . . . . . . . . . . . . . . . . . . . . . 7.4.5 Subphase 5: Long-Listing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.4.6 Subphase 6: Shortlisting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.4.7 Subphase 7: Site Visits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.4.8 Subphase 8: Selection of Preference Sites. . . . . . . . . . . . . . . . . . 7.4.9 Subphase 9: Definition of the Preference Site. . . . . . . . . . . . . . . 7.4.10 Subphase 10: Decision. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.5 Excursus: The Processes of Decision-Making. . . . . . . . . . . . . . . . . . . . . . 7.5.1 The Decision-Making Processes. . . . . . . . . . . . . . . . . . . . . . . . . 7.5.2 The Principles of Cooperation During the Project . . . . . . . . . . . 7.6 Amalgamation of the Overall Process. . . . . . . . . . . . . . . . . . . . . . . . . . . .

185 185 186 188 188 188 190 193 194 195 196 196 199 199 200 200 200 202 203

8 Site Determination in Practice: A Case Study. . . . . . . . . . . . . . . . . . . . . . . . . 8.1 Basics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.2 The Initial Situation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.3 The Location Determination Process. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.3.1 The Project Organization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.3.2 The Basic Definition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.3.3 Regional Delimitation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.3.4 Regional Screening . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.3.5 Long-Listing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.3.6 Shortlisting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.3.7 Site Visits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.3.8 Selection of Preferred Sites. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.3.9 Definition of the Preference Site. . . . . . . . . . . . . . . . . . . . . . . . . 8.3.10 The Decision. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

205 205 205 206 206 207 209 210 212 212 226 226 229 232

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9 Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.1 Basics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.2 Dealing with Site Factors and Methods. . . . . . . . . . . . . . . . . . . . . . . . . . . 9.3 A Recommendation for Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.4 Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

XI

233 233 234 239 241

Appendix 1: Complete List of Macro-Site Factors . . . . . . . . . . . . . . . . . . . . . . . . 243 Appendix 2: Complete List of Micro-Site Factors. . . . . . . . . . . . . . . . . . . . . . . . . 251 Appendix 3: Assessment Tables According Cost-Effectivenes Analysis. . . . . . . . 267 Assessment of Qualitative Site Criteria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 269 Assessment of Qualitative Site Criteria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 271 Assessment of Qualitative Site Criteria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 273 Assessment of Qualitative Site Criteria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 275 Assessment of Qualitative Site Criteria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 277 Assessment of Qualitative Site Criteria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 279 Assessment of Qualitative Site Criteria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 281 Assessment of Qualitative Site Criteria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 283 Assessment of Quantitative Site Criteria Und Overall Assessment. . . . . . . . . . . 285 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 287

List of Abbreviations

AbfKlärV Sewage Sludge Ordinance of the Federal Republic of Germany AllMBl General Ministerial Gazette of the Free State of Bavaria AOX Adsorbable organically bound halogens ASEAN Association of South East Asian Nations BauGB Building Code BauNVO Federal Land Utilization Ordinance BBodSchG Federal Soil Protection Act BBodSchV Federal Soil Protection Ordinance BGF Gross floor area according to DIN 277 BImSchG Federal Immission Protection Act BMZ Cubic index BRS Business risk service CAPEX Capital expenditures CBA Cost-benefit analysis CEA Cost-effectiveness analysis CFP Complete financial plan CHC Chlorinated hydrocarbons CIREC China Industrial Real Estate Council CIS Commonwealth of Independent States (confederation of the countries of the former Soviet Union) CPI Corruption perception index CRE Corporate real estate CREM Corporate real estate management DIN German Institute for Standardization DTA Double taxation agreement DVP German Association of Project Managers (since 2003: German Association of Project Managers in the Construction and Real Estate Industry) EESC European Economic and Social Committee EIA Environmental impact assessment EIU The Economist Intelligence Unit Ltd. XIII

XIV

List of Abbreviations

EOX Extractable organically bound halogen compounds, a term for adsorbable organically bound halogens (AOX) in solid samples EPA Environmental Protection Agency (U.S.) EPC Engineering, procurement and construction (as EPC contract) EUR Euro FDI Foreign direct investment FFH Fauna-Flora-Habitat (as FFH Directive) FTE Full-time equivalent GDP Gross domestic product GFZ Floor index GNP Gross national product GRZ Coverage index HCs Hydrocarbons HHCs Halogenated hydrocarbons IBC Intermediate bulk container ICRG International Country Risk Guide IDW Institute of Public Auditors in Germany IMF International Monetary Fund ImmoWertV Ordinance on the Principles for Determining the Market Value of Real Estate (Real Estate Appraisal Ordinance), in the current version of 2010 IP Intellectual property IRR Internal rate of return ISBL Inside of battery limit (inside a defined core area of a production facility, e.g., a production hall) JV Joint venture LOI Letter of intent LPT Local public transport MoU Memorandum of understanding NAFTA North American Free Trade Agreement NGO Non-governmental organization OPEX Operating expenditures ORI Operational risk index OSBL Outside of battery limit (exclusive area of a production facility that lies outside the defined core area of the production facility concerned, e.g., supporting infrastructure such as an exclusive tank farm) PAH Polycyclic aromatic hydrocarbons PCBs Polychlorinated biphenyls PD Project development PolyTHF Polytetrahydrofuran (produced from THF, precursor for synthesis of textile fibers) PPS Production planning and control systems PRI Political risk index

List of Abbreviations

XV

R&D Research and development rnr Real estate not required for operations SME Small and medium-sized enterprises SUV Sport utility vehicles TCDD Tetrachlorodibenzodioxin THF Tetrahydrofuran (organic solvent, belonging to the substance class of ethers) TOTEX Total expenditures USD United States dollar UVA Utility value analysis VLSwB Preliminary delivery conditions for construction materials to be reused in road pavements VS Bird protection (as VS Directive) VW-RL Comparative Value Ordinance in the current version of 2014 VwV Administrative regulation VwVwS Administrative Regulation on Substances Hazardous to Water WertR Ordinance for the Determination of Fair Values (Market Values) of Real Estate (Valuation Ordinance), in the latest version of 2006 (WertR 06) WHC Water hazard class (according to VwVwS) WHC 1 Slightly hazardous to water WHC 2 Hazardous to water WHC 3 Highly hazardous to water WOFIE Wholly-owned foreign invested enterprise

Symbol Directory of Mathematical Formulas

A Area B Consideration space; with 1, 2, 3, ... k consideration spaces (Bk) C Costs, expenses; with 1, 2, 3, ... r cost items (Cr) c Cost share D Distance d Density (as investment density) Δ Difference E Degree of fulfilment F (area-related) Key figure G Weighting I Income, revenues K Criterion; with 1, 2, 3, ... j criteria (Kj) M Profit, margin μ Expected value of a (statistical) distribution N Benefit P (Market) Potential p Interest rate q Accumulation factor 1/q Discount factor R (Statistical) Span S Site; with 1, 2, 3, ... i site alternatives (Si) Σ Sum σ Standard deviation of a (statistical) distribution 2 σ Variance of a (statistical) distribution T Risk t Time; with 1, 2, 3, ... n periods (tn) U Turnover V Ratio, quotient

XVII

XVIII

Symbol Directory of Mathematical Formulas

v Variance coefficient of a (statistical) distribution W Value X Base size, comparison size Z Cash flow

List of Figures

Fig. 2.1 Fig. 2.2 Fig. 2.3 Fig. 2.4 Fig. 2.5 Fig. 2.6 Fig. 2.7 Fig. 3.1 Fig. 3.2 Fig. 3.3 Fig. 3.4 Fig. 3.5 Fig. 3.6 Fig. 3.7 Fig. 3.8 Fig. 3.9 Fig. 3.10 Fig. 3.11 Fig. 3.12 Fig. 3.13 Fig. 3.14 Fig. 4.1 Fig. 4.2 Fig. 4.3 Fig. 4.4 Fig. 4.5 Fig. 4.6

Overview of real estate management disciplines. . . . . . . . . . . . . . . . . . . Degree of complexity of real estate used for business purposes. . . . . . . Interactions of core business and CREM. . . . . . . . . . . . . . . . . . . . . . . . . BASF Ludwigshafen plant. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Marketability of corporate real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate portfolios—breakdown by type of use. . . . . . . . . . . . . . . . . . Ownership rates by type of use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Project development terms. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Environment of the project developer (stakeholder perspective). . . . . . . Environment of the project developer (qualification) . . . . . . . . . . . . . . . Project development process. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Constellations of triggers of a project development. . . . . . . . . . . . . . . . . Cycles of the office real estate market in Europe 2006–2010. . . . . . . . . Structures of global production networks (according to McKinsey/PTW) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Structure of the concept of risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Overall risk of an investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Breakdown of selected risks of industrial projects. . . . . . . . . . . . . . . . . . Risk management structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Country preselection for production activities. . . . . . . . . . . . . . . . . . . . . Methods of investment calculation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Project phases according to the Anglo-Saxon model. . . . . . . . . . . . . . . . Systematics of the industrial location theory according to Kaiser. . . . . . Location strategy concepts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Opportunities for the development of foreign markets . . . . . . . . . . . . . . Framework conditions for a project. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Classification of tax types using the example of Germany . . . . . . . . . . . Continuum of hard and soft location factors. . . . . . . . . . . . . . . . . . . . . .

7 10 12 14 15 21 22 24 25 26 27 28 31 37 40 41 42 42 44 45 47 52 54 56 58 63 66

XIX

XX

Fig. 4.7 Fig. 4.8 Fig. 4.9 Fig. 5.1 Fig. 5.2 Fig. 5.3 Fig. 5.4 Fig. 5.5 Fig. 5.6 Fig. 5.7 Fig. 5.8 Fig. 5.9 Fig. 5.10 Fig. 5.11 Fig. 5.12 Fig. 5.13 Fig. 6.1 Fig. 6.2 Fig. 6.3 Fig. 6.4 Fig. 6.5 Fig. 6.6 Fig. 6.7 Fig. 6.8 Fig. 6.9 Fig. 6.10 Fig. 6.11 Fig. 6.12 Fig. 6.13 Fig. 7.1 Fig. 7.2 Fig. 7.3 Fig. 7.4 Fig. 8.1 Fig. 8.2 Fig. 8.3

List of Figures

Interaction of soft location factors and degree of information. . . . . . . . . Schematic overview of BASF’s major production sites. . . . . . . . . . . . . . Economic advantages of the BASF compound site in Ludwigshafen. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Three-dimensional classification of location factors (three examples). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Overview of chemical parks in the PRC (2008) . . . . . . . . . . . . . . . . . . . Relevance of markets for the production location. . . . . . . . . . . . . . . . . . PR China—route of the West–East-Pipeline. . . . . . . . . . . . . . . . . . . . . . Soil protection terms in the context of contaminated sites . . . . . . . . . . . Workflow of contaminated site management (schematic). . . . . . . . . . . . Remediation and monitoring measures for contaminated sites. . . . . . . . Schematic plant plan and definition of terms. . . . . . . . . . . . . . . . . . . . . . Creation of a factory master plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Overview of land rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Overview of technical infrastructure terms. . . . . . . . . . . . . . . . . . . . . . . Comparison of settlement agreement and utility and site service contract. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capozza and Helsley model (schematic). . . . . . . . . . . . . . . . . . . . . . . . . Differentiation of methods according to the type of result variable. . . . . Overview of the methods investigated. . . . . . . . . . . . . . . . . . . . . . . . . . . Checklist in the initial phase of a site search (example) . . . . . . . . . . . . . Pairwise comparison (example). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Two-dimensional preference matrix (schematic). . . . . . . . . . . . . . . . . . . Risk matrix (example). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Decision tree (schematic). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Example of a classification tree. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Classification tree for the selection process in long-listing. . . . . . . . . . . Possibilities of quantitative project evaluation. . . . . . . . . . . . . . . . . . . . . Derivation of a cash value for seven periods (schematic) . . . . . . . . . . . . Limit value consideration for CEA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Possible scenarios depending on the period of the forecast. . . . . . . . . . . China’s economic regions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Scale comparison PR China and European Union (2017). . . . . . . . . . . . Decision-making principles across the entire project development process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Illustration of the site search in the project development process. . . . . . Summary of the needs assessment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated requirements catalog . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Regional delimitation of the target areas. . . . . . . . . . . . . . . . . . . . . . . . .

67 71 72 76 80 82 83 101 103 104 107 108 115 129 130 142 148 149 152 154 155 157 159 160 161 162 172 178 181 194 195 202 204 208 209 210

List of Figures

XXI

Fig. 8.4 Fig. 8.5 Fig. 8.6

213 225

Fig. 9.1 Fig. 9.2

Relevance tree for the selection process in long-listing. . . . . . . . . . . . . . Site alternatives of the shortlist . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Network diagram of the preferred variants (qualitative characteristics) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Influenceability of project results. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Funnel model for site decision. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

230 235 236

List of Tables

Table 2.1 Table 4.1 Table 4.2 Table 4.3 Table 5.1 Table 5.2 Table 5.3 Table 6.1 Table 6.2 Table 6.3 Table 6.4 Table 6.5 Table 6.6 Table 6.7 Table 6.8 Table 6.9 Table 8.1 Table 8.2 Table 8.3 Table 8.4 Table 8.5 Table 8.6 Table 8.7 Table 8.8

Real estate portfolios of DAX 30 companies (2004 and 2016). . . . . . . . Reasons for relocations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Relevance of selected soft location factors. . . . . . . . . . . . . . . . . . . . . . . BASF SE sites worldwide (as of December 31, 2016). . . . . . . . . . . . . . Intellectual property in China’s courts . . . . . . . . . . . . . . . . . . . . . . . . . . Nationwide overview of contaminated site statistics in Germany . . . . . Upper limits of the extent of construction allowed according to BauNVO. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Structure of a utility matrix (Hanusch, 1994). . . . . . . . . . . . . . . . . . . . . Degree of fulfilment of criteria Kj at site Si. . . . . . . . . . . . . . . . . . . . . . . Partial utility values of criteria Kj at site Si. . . . . . . . . . . . . . . . . . . . . . . Total utility value at site Si . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Example of a cost–benefit analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Structure of a cost-effectiveness matrix . . . . . . . . . . . . . . . . . . . . . . . . . Example of a cost-effectiveness analysis . . . . . . . . . . . . . . . . . . . . . . . . Sensitivity analysis in addition to a CEA (example). . . . . . . . . . . . . . . . Example of a possible consistency matrix according to Kinkel (excerpt). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Questionnaire for shortlisting (case study). . . . . . . . . . . . . . . . . . . . . . . Weighting of the qualitative site factors (case study). . . . . . . . . . . . . . . Overview and ranking of the qualitative site comparison. . . . . . . . . . . . Overview and ranking of land prices. . . . . . . . . . . . . . . . . . . . . . . . . . . . Preferred variants according to cost-effectiveness analysis . . . . . . . . . . Simplified summary of location factors . . . . . . . . . . . . . . . . . . . . . . . . . Simplified summary of site factors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Summary of the site decision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

20 65 70 70 90 102 127 164 165 165 166 174 176 177 180 183 215 221 227 228 229 230 231 232

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1

Introduction

1.1 Some Introductory Thoughts Finding an ideal location is one of the basic concerns of any living thing. From a macroperspective, this is the ideal habitat. From a micro-perspective, this can be, for example, a protected watering hole or a safe place to rest at night. Finding the right place is, of course, preceded by the search for it. This should—unsurprisingly—be associated with as little effort as possible. In nature, such efficiency is achieved through experience coupled with the will to survive (in the sense of learning from mistakes) and by passing this experience on to subsequent generations. It is similar with humans. The only difference is that our criteria and methods are much more sophisticated and much more specific for the respective purpose. At least we think they are. The search for a location for industrial settlements is a challenge that has arisen again and again since the beginning of industrialization. Only the requirements and the associated problem areas have changed significantly over time. As early as the nineteenth century, the first efforts were made to expand industrial production across countries and continents. These first—albeit very tentative—steps were essentially driven at the time by the availability of raw materials in the colonies of the industrialized nations as well as the markets in North America and Europe. Thus, the roots of trade relations as well as production outside the home market of Germany’s large, traditional, industrial companies go back to that time. After the end of the World War II, international trade and, downstream from trade, international production, expanded more and more. The driving factors behind this are very diverse. Since the end of the 1980s, at the latest, we have been speaking about the age of globalization. Much has already been written about globalization in recent years. Decisions on the location of industrial companies are among the topics that very quickly attract the atten© Springer Fachmedien Wiesbaden GmbH, ein Teil von Springer Nature 2024 T. Glatte, Location Strategies, https://doi.org/10.1007/978-3-658-42417-6_1

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1 Introduction

tion of politicians and the media and are thus, unfortunately, also very quickly accompanied by emotions. It is often forgotten that industrial companies do not have a charitable mission. (Almost) every decision is underpinned by a rationale that may be poorly communicated at times, but certainly makes sense because it is based on economic facts. A look into the world of companies shows that a significant part of the aspects influencing settlement is of a real estate nature. Ultimately, an industrial settlement is nothing more than a special form of project development—real estate project development that is very much geared to specific needs. Whether this really has to be a special type of property is another issue. This book deals only marginally with this question. Its aim is rather to show the criteria and methods of industrial companies that are relevant to settlement. The trend toward globalization of industrial production in recent years brings many additional aspects to the search for new locations. In the past, international location decisions were primarily an issue for large companies. This has changed fundamentally. Today, small and medium-sized enterprises (SMEs) are equally exposed to international competition. Therefore, they also have to deal increasingly with this topic. The need to establish branches and production sites abroad is therefore no longer a problem for a comparatively small, elite group of companies. Rather, it is now a task that almost all medium-sized and larger companies, as well as an increasingly growing number of small companies, have to deal with. The growing preoccupation with this topic can also be seen in the development of specialist literature, which has been characterized by recurring spurts of interest. During the beginnings of internationalization, in the ’60s and ’70s, there was a surge of interest; and in the ’80s and early ’90s, there was an intensified examination of the subject in Anglo-Saxon literature, and especially in the U.S. This was due to a large number of new industrial settlements or industrial relocations in the U.S. itself, but also in countries such as Mexico and the Asian tiger economies (Korea, Taiwan, Hong Kong and Singapore), as well as the later, so-called, tiger cub states of Thailand, Malaysia, Indonesia and the Philippines. In the German-language literature, the early ’90s were essentially characterized by production shifts toward Eastern Europe and sometimes East Asia. For more than a decade after that there were very few publications on the topic of international industrial settlement. Since then, i.e., in the 2000s, there has been a noticeable increase in interest and, thus, in the number of publications in German-language media and literature. However, there are quite different technical approaches to the problem of global business settlement in the literature. The dominant approach is the generalist one, which tries to illuminate all components of a location decision. Examples of this are Erfolgsfaktor Standortplanung (Success Factor Location Planning, Kinkel, 2004) and Handbuch Globale Produktion (Global Production Manual, Abele, Kluge and Näher, 2006). However, these specialist books are quite general in terms of the variety and complexity of topics they cover. Furthermore, there is specially oriented technical literature which, in international business, essentially relates to production processes, management processes, or personnel and logistics costs. If they are considered at all, the specialist literature only looks at construction and real estate-specific aspects of a site search with a

1.2  The Structure of This Book

3

view to a spatially very limited market (e.g., the German, English, or American market). And in the specialist literature focusing on global markets, these aspects are only dealt with in a very limited, general, and peripheral manner. This is where this book comes in, aiming to close the existing gap, especially in terms of real estate economics and construction technology.

1.2 The Structure of This Book In industrial companies, real estate assets account for a very substantial share of their total fixed assets. Furthermore, construction costs and land acquisition represent a substantial share of the total investment costs of a location settlement. Except for lightweight construction, which mainly plays a role in the logistics sector and in simple production processes, a significant amount of the initial investment in the form of the new build is, therefore, the first hurdle to be overcome for foreign production. And it is also a very significant obstacle to relocating the production site should the original choice of location prove to be less than ideal at a later date. Thus, the location of a company’s real estate (due to the complexity of general real estate conditions such as climate, topography, infrastructure, etc.) has a significant influence on the overall entrepreneurial success of an investment. Therefore, the selection of a location has always been an essential element of corporate real estate management (Knight, 2008, S. 8). Chapter 2 introduces the basics of corporate real estate management. The basic concepts are defined, and special features of corporate real estate are highlighted. The chapter provides an overview of the real estate portfolios of German companies. Chapter 3 deals with the fundamentals of project development as a real estate value creation process. As already explained, location development is a special form of classic project development. It therefore makes sense to look at its basic elements. This chapter gives the respective definitions and provides a detailed explanation of the individual phases of project development up to the start of construction—the initial phase, the conceptual phase, and the implementation phase. This is rounded off by a section on the significance of project development in industrial companies. Chapter 4, based on these introductory chapters, deals with the basics of industrial location theory. In addition to a brief outline of the historical development of industrial location theory, the subject area is structured in terms of content, and the concepts of location and location attractiveness are defined. An introduction to location strategy concepts and forms of market entry is also given. The chapter concludes with a detailed consideration of the most diverse perspectives on possible location factors. Chapter 5 looks in detail at the diverse methods of location assessment. These are structured in terms of their systematics and applicability. A distinction is made between qualitative and quantitative methods. Qualitative methods include setting standards, creating checklists, pair comparison, the preference matrix, and the classification tree.

4

1 Introduction

Quantitative methods encompass the utility value analysis, the cost–benefit analysis, and the cost-effectiveness analysis. This book deliberately forgoes any consideration of investment calculations as purely financially guided quantitative methods. For this perspective, the reader is referred to the readily available literature on this topic, e.g., Entwicklung betrieblicher Immobilien—Beschaffung und Verwertung von Immobilien im Corporate Real Estate Management (Development of Corporate Real Estate—Procurement and Utilization of Real Estate in Corporate Real Estate Management, Glatte, 2014). However, with the sensitivity analysis and the scenario analysis, two methods are presented that also play a special role in addition to the aforementioned methods. Chapter 6 describes the process of determining the location. This is described in detail as a ten-phase model. Time as an additional influencing factor is also discussed in detail. In a side note, various findings on decision-making and decision-making processes are discussed. The chapter is summarized with a presentation of the overall process. In many segments of the real estate market, the quality of locations and the significance of influencing factors can be argued from very different perspectives. This can go so far as locations being created by project developments. However, this only applies to industrial locations in exceptional cases. This segment of the real estate market is characterized by very clear, indispensable business requirements. Chapter 7 is devoted to the many location criteria for manufacturing sites. These are explained in detail from the perspective of macro-location and micro-location criteria. In addition, assistance is provided with regard to obtaining the necessary information for assessing the respective criteria. For this purpose, the general conditions for obtaining information are explained and the possible sources of information are described. Chapter 8 serves to illustrate the previous chapters. A practical case is used as an example of the process of determining a location for corporate real estate. The case study shows the application of the methods described in earlier chapters and the selection and weighting of location factors for an industrial site in an emerging market. Chapter 9 summarizes the chapters of this book and concludes with a discussion of the methods used. In addition, a recommendation for practical action is given. The book closes with a personal view of the author on the entrepreneurial process of site search. Detailed lists of location factors from the macro-location and micro-location perspectives are attached in Appendix 1 (Macro-location Factors) and Appendix 2 (Microlocation Factors) as decision-making aids for practitioners. Appendix 3 provides the evaluation tables of the cost-effectiveness analysis used in the practical example.

2

The Basics of Corporate Real Estate Management

2.1 Basics It is true that it is important for both types of property owners—investors and corporates—to manage their property as efficiently as possible. The return of real estate for the investor is rather low compared to other investment opportunities, and a lack of efficiency further reduces it. Increasing cost pressure is forcing manufacturing companies to optimize their expenditures for the operation and maintenance of real estate, but also to fundamentally scrutinize the ownership of real estate itself. Nevertheless, there are clear differences in the economic treatment of real estate between the two forms of real estate owner—the professional real estate investor and the company/authority. These result from fundamentally different perspectives, which ultimately lead to a different value orientation and different conceptual approaches. These differences are based on the following basic real estate considerations (Glatte, 2009, S. 198 ff.): • • • •

What is the company’s strategy? What is the basis for measuring the success of the property? How marketable is the property? What time availability is required for the property?

This chapter is designed to answer these questions—supplemented by conceptual delimitations and an overview of corporate real estate.

© Springer Fachmedien Wiesbaden GmbH, ein Teil von Springer Nature 2024 T. Glatte, Location Strategies, https://doi.org/10.1007/978-3-658-42417-6_2

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6

2  The Basics of Corporate Real Estate Management

2.2 The Term “Corporate Real Estate” Corporate real estate management (CREM) refers to all property-related activities of a company whose core business is not real estate. CREM deals with the economic procurement, management, and utilization of the real estate of production, trading, and service companies within the framework of the corporate strategy. The real estate serves to carry out and support their core activities (Zentraler Immobilien Ausschuss & CoreNet Global Inc., 2014, S. 1). CREM refers to the real estate assets of private-sector companies (corporates), which is why it is referred to as corporate real estate. Their original corporate purpose is aimed at any form of entrepreneurial activity—except for the construction, management, or utilization of real estate. From the perspective of the real estate industry, they are therefore also called non-property companies (Schulte & Schäfers, 1998, S. 45). A comprehensive 2014 study by the CoreNet Global trade association and the Central Real Estate Committee put the value of total corporate real estate assets in Germany at around 3 trillion euros (Pfnür, Die volkswirtschaftliche Bedeutung von Corporate Real Estate in Deutschland, 2014, S. 16). Of this, around 500 billion euros is accounted for by land values. The study concludes that around one-third of real estate assets in Germany fall into the corporate real estate category. In this context, corporate real estate management (CREM) in a broader sense encompasses all strategic, tactical, and operational levels of real estate value creation, i.e., portfolio management, asset management, property management, and building management, and often even more extensive infrastructural services, also called facility services (Nävy & Schröter, 2013, S. 13). Figure 2.1 illustrates this structure (Glatte, 2013, S. 44). This in itself is hardly surprising—after all, it coincides with the world of real estate management that we are familiar with. So, what makes CREM so different? So-called institutional real estate management focuses on the acquisition, management, and sale of real estate for the purpose of investment. In this case, we speak of investment properties. The primary focus, i.e., the core business, of institutional real estate management is therefore logically on generating a return from dealing with real estate. Such companies are also called property companies. As a result, the (institutional) real estate manager’s task is ultimately to balance the return and the risks arising from the property. Unlike in the classical real estate sector, the primary drivers for the construction, design, management, and utilization of real estate in the corporate real estate industry are not the real estate returns that can be achieved through construction, leasing, or sale, but the (internal) user requirements (Glatte, 2009, S. 198). Depending on the type of core business and the type of real estate, these requirements can be quite simple, average, or highly complex. In corporate real estate management, the requirements regarding utilization are traditionally specified by the users themselves.

2.2  The Term “Corporate Real Estate”

7

TAXONOMY OF REAL ESTATE MANAGEMENT – (REM) Investment property

Owner-occupied property

(Infrastructural) facility services

Purpose of property

Investment

Utilization

Support

Objective of real estate activity

Optimization of risk, return, liquidity

Optimization of internal value contribution

Effectiveness & efficiency

Management concept

Profit-oriented real estate management

Use-oriented real estate management

Operative excellence

Company concept

Property company

Non-property company

Service

Institutional real estate management

Corporate real estate management (CREM)*

Strategic

Portfolio perspective

Portfolio vs. building

Tactical

*Note: this also applies to the REM of real estate owned by public authorities or the church

(Real estate) Portfolio management

Superordinate strategic tasks focusing on the entire real estate portfolio or major parts thereof including the definition of operator, user, and service strategies

(Real estate) Asset management

Strategic and tactical tasks focusing on (smaller) real estate portfolios or individual buildings including cross -regional commissioning / control of further services (facility services)

Property management

Individual building or service perspective

Operative

Management focus and value driver levels

Strategic vs. operative

Local tactical tasks and owner function (landlord) focusing on local real estate portfolio or individual buildings including commissioning / control of further services (facility services)

Building management

Local operative tasks focusing on the management of a small local real estate portfolio or of individual buildings including commissioning / control of subcontractors for individual disciplines

Facility services

Operative services beyond the management of the building itself

Facility management

Type of property

Fig. 2.1   Overview of real estate management disciplines

In this context, users are the employees and representatives of the corporates’ core business. These are ultimately also the areas that earn the actual money in the company. The specific specialist strategies of all functions supporting the core business—including personnel, IT, etc., as well as corporate real estate management—are derived from their strategic guidelines, the corporate strategy (Haynes & Nunnington, 2010, S. 31). For this reason, their role is comparatively strong compared to the representative of the real estate perspective—the corporate real estate manager. In real estate jargon, there is thus by nature a tenant market in corporates driven by internal clients. Nevertheless, it cannot automatically be concluded from this that the user representatives are always right in the final analysis and that their decisions must be considered final. This stress field is dealt with separately in Sect. 2.5.

2  The Basics of Corporate Real Estate Management

8

2.3 Conceptual Delimitations 2.3.1 Essential Real Estate vs. Non-Essential Real Estate Real estate is necessary for a corporate to fulfill the actual purpose of its core business. Commercial and industrial manufacturing takes place in production buildings; maintenance of production facilities is carried out in workshop buildings; research is conducted in laboratories; administrative activities are handled in office buildings; and social buildings are required for general supplies but also for employee qualification, e.g., in the form of canteens or training centers. Where the need is fully justified operationally, these properties are necessary for business operations. For a variety of reasons, this operational need can change over the life cycle of a property. As soon as this need no longer exists, the property is no longer necessary for operations. In such a case, however, it still ties up capital that is not available to the actual core business as a means of investment. The identification of properties within the company that are no longer required for operations and their optimized utilization—from the point of view of the respective company—with regard to possible opportunities and risks are among the absolute core tasks of a corporate real estate manager (Glatte, 2014, S. 10).

2.3.2 Industrial Real Estate and Corporate Real Estate There is much confusion in the literature, as well as in the relevant specialist media, about the terms corporate real estate and industrial real estate. This must first be clarified and resolved. Industrial real estate is basically a very limited scope of real estate that can be found in the environment of industrial manufacturing and logistical processes as well as their subsequent commercial uses. According to the Initiative Unternehmensimmobilien (Industrial Real Estate Initiative), these are, for example, the following asset classes (Bulwien Gesa, 2014, S. 4): • • • •

production buildings logistics buildings transformational real estate business parks.

Transformational real estate includes properties that are not or no longer required for operations and which, as former production sites, have a building structure that has grown organically for operational reasons. They usually have a so-called campus character, i.e., they do not consist of individual buildings but of a building complex—usually also connected in terms of infrastructure. The transformation process is understood to be

2.4  The Specific Characteristics of an Industrial Property

9

the transition, often lasting several years, from a previously full (own) use to a different subsequent use by third parties. This is preceded by the classification of the property as non-essential real estate by the previous user. In this case, the property is classically sold by the corporate and, if necessary, partially leased back. The existing rental income offers the buyer the opportunity to significantly reduce development and financing risks and to use this income to carry out conversion or refurbishment measures. The buyers of such transformational properties are often project developers who accompany the transformation process to a fungible and thus marketable business park and then sell it to investors as an investment property after the transformation process has been largely completed. The term light industrial real estate often used in Anglo-Saxon property markets comprises the aforementioned asset classes of industrial real estate, but excluding the production buildings still in original use, i.e., only logistics properties, industrial parks, and transformational properties. The term corporate real estate is much broader. It encompasses all forms of real estate that corporates require for the implementation of their core business, i.e., also administrative buildings, social buildings, training centers, research and application technology buildings, agricultural buildings such as greenhouses, etc. (Glatte, 2014, S. 11). It can be any type of real estate, as long as the use serves the business purpose itself. In these cases, too, the literature occasionally—and then incorrectly—uses the term industrial real estate. In this book, the term industrial real estate refers to the asset classes listed above and is understood as a subset of corporate real estate.

2.4 The Specific Characteristics of an Industrial Property In Sect. 2.2, it was shown that the perspective on real estate in CREM is very different from traditional real estate management. The question now arises as to what type—or asset class—of real estate a CRE manager has to deal with. The legally correct answer to this question is: it depends—namely on what kind of core business the company is engaged in. A bank typically has an owner-occupied portfolio for headquarters and call centers (office properties), branches (retail properties), and data centers (specialty properties). An industrial company, in contrast, often has a wide range of administrative, research, manufacturing, and logistics activities. Because of these activities, all conceivable asset classes will ultimately be found in the CRE manager’s real estate portfolio in such a company. The respective asset classes are of very diverse complexity, but must be equally professionally procured, managed, and ultimately reused. Figure 2.2 visualizes the different complexities of industrial real estate in terms of technical, commercial, and infrastructural aspects (Glatte, 2012, S. 35).

2  The Basics of Corporate Real Estate Management

10

commercial

Building management (DIN 32736) infrastructural

technical

Free & traffic areas

simple

simple

simple

Office properties

simple

simple

simple

Retail properties

simple

simple

simple

Social buildings

simple/medium

simple/medium

simple/medium

Warehouses

simple

simple

simple

Hazmat stores

medium

medium

medium

Lab buildings

simple

medium

medium

Pilot plants

medium

medium

medium

Factory halls

simple

simple

medium

Complex production

high

high

high

high

high

high

Real estate asset class

Logistics

R&D

Production

Supplies & disposal (power, sewage, etc.)

Fig. 2.2   Degree of complexity of real estate used for business purposes

Moreover, a comparison of industrial real estate with the pure investor perspective is only meaningful if the real estate in question is comprehensively marketable in terms of type and location. However, the marketability of corporate real estate is essentially determined by its third-party usability. In the case of corporate real estate, this is often only given to a limited extent (see Sect. 2.6). Third-party usability is comparatively simple in the case of administrative buildings, as long as their location permits office use. For a wide variety of understandable reasons (immission control, transport links, land prices, etc.), industrial or commercial manufacturing companies are forced to establish and develop sites on the outskirts or far outside urban areas. This decentralized location makes subsequent use dramatically more difficult in the event of a reduction in production capacity or plant closure. However, these aspects of third-party usability, which are still easy to understand in the case of production and research buildings, can also apply to other types of real estate, e.g., office properties. For example, the necessity of constructing administrative buildings within production sites or in peripheral industrial estates rather than in office-specific locations must be fundamentally questioned. Such office properties can hardly be brought to market when they fall vacant and are therefore de facto a special property that

2.5  Corporate and Real Estate Strategies

11

is too risky for an external financier. As a result, such real estate is ultimately a burden on the core business as a cost item. Globalization does not stop at corporate real estate management. It is even one of its drivers for professionalization. More and more companies not only operate internationally as exporters and importers, but they also establish subsidiaries in other countries for sales, logistics, research, and production. This changes the actions of the CRE manager (Hines, 1990, S. 46). They learn and often quite painfully realize that their area of responsibility literally relates to real estate values and that it is therefore they who ultimately must move. They have to deal with other cultures—their legal systems, business practices, currencies, financing models, payment methods, and measurement systems, to name but a few aspects of the endless list of additional complexities. The CRE manager also recognizes the unavoidable necessity of acquiring some competence in real estate business issues in the countries to be managed. In addition, they are faced with the fundamental question of which topics are to be handled at the level of the overall portfolio (strategic level) and which tasks need to be dealt with at the tactical and operational level by them or—internal or external—third parties (see Fig. 2.1). This applies equally to the feasibility of management concepts. Concepts developed in the literature and implemented in practice often refer only to selected types of real estate, e.g., office, residential, and hotel properties. In corporate real estate management, however, the various types of real estate are of varying importance to the user, i.e., the core business. Errors in management, such as heating failure, deficiencies in maintenance cleaning, etc., have different economic consequences in an administrative building than in a research building or even in a cleanroom production facility. One size fits all therefore does not work, especially with heterogeneous portfolios. The CRE manager has to deal with the extent to which the respective properties are critical for the core business. Depending on the risk classification of the assets, their location, and the available service providers and their performance profile, customized management concepts may have to be developed.

2.5 Corporate and Real Estate Strategies In contrast to property companies, whose core business and therefore also corporate strategy are shaped by real estate, real estate-related strategies at non-property companies must be subordinated to the general corporate strategy. In short, the core business determines how real estate is handled, rather than the other way around. But this is precisely the problem that CRE managers have had to deal with for years. On closer inspection, a pure top-down hierarchy between business and CREM does not seem particularly appropriate, but rather an interaction between clearly defined specifications of the core business on the one hand and their relationship with the realities of the real estate business on the other. Figure 2.3 illustrates this process (Glatte, 2014, S. 13).

12

2  The Basics of Corporate Real Estate Management

CORE BUSINESS COMPANY STATEGY

Alignment with other substrategies of the group (HR, IT, etc.)

REAL ESTATE STRATEGY

REAL ESTATE MANAGEMENT (CREM) Fig. 2.3   Interactions of core business and CREM

Why should this be so? A glance at the balance sheets of German companies reveals that they still report very high real estate assets (5 to 20 percent of fixed assets). Inquiries to real estate departments confirm that the ownership rates in the real estate portfolio are still very high (see Sect. 2.10). Upon detailed inquiry about real estate or workplace-related costs, which require a fairly high level of transparency with regard to processes, the real estate portfolio and, ultimately, costs, the number of contacts thins out very quickly due to the very heterogeneous level of maturity of the respective real estate departments in the corporates. It is not even apparent that, because of the cost pressure, economically weaker companies have a higher level of transparency than supposedly high-yield companies. The background to this is the fact that in many companies the alignment between corporate and real estate strategy, and thus between operational requirements and real estate implementation, is seen as a one-way street; in other words, the CREM department acts purely as an implementer of operational requirements. The result is a lack of transparency, an extensive portfolio of space not required for operations or not used efficiently, and thus high real estate costs, which ultimately lead to uncompetitive operating and workplace costs. It is precisely the inflexible, immobile nature of real estate that requires the internal strategic one-way street to be turned into a two-way traffic system (see Fig. 2.3). In today’s dynamic and demanding economic environment, what counts most are flexibility, speed, and high returns. These are all specifications for which real estate is not exactly known in the classic investment market. There, real estate is valued more as a portfolio

2.6  The Marketability of Corporate Real Estate

13

addition, especially by pension funds, because of its stability and security at the cost of lower returns.

2.6 The Marketability of Corporate Real Estate A comparison with the pure investor perspective is only meaningful if the real estate in question is comprehensively marketable in terms of type and location. However, the marketability of corporate real estate is essentially determined by its third-party usability (Bienert, 2005, S. 4). In the case of industrial real estate, this is often only given to a limited extent (see Sect. 2.4). For a wide variety of understandable reasons (immission control, transport links, land prices, etc.), industrial or commercial manufacturing companies are forced to establish and develop sites on the outskirts or far outside urban areas. In the event of shifts in production capacities that lead to a reduction in site utilization, alternative uses are only feasible to a limited extent. Conversion or use by third parties is still comparatively easy in the case of standardized production and storage halls. These can be used, if necessary, with deductions due to various user-specific peculiarities in construction, fittings, connections, or use of the property. However, the creation of specifications in the sense of marketable construction and development standards for industrial buildings and warehouses would help to reduce the number of non-marketable and thus unusable special properties in the company. This would, for example, be a possible value contribution from interweaving real estate and corporate strategy (see Sect. 2.5). This is much more difficult in the case of production and storage facilities that are tailored to very specific products or processes (see Fig. 2.4, BASF SE, 2016). These special-purpose properties can thus only be used for the purpose for which they were designed (Bienert, 2005, S. 5). In practical terms, a use corresponding to the value of the real estate is only possible with the sale of the business in question (and thus the securing of an adequate further use of the real estate). Here too, however, a strategic decision must first be made from the perspective of the company’s core business as to whether such continued use by a third party is at all desirable. This usually only happens if the core business in question is not to be continued within the company anyway and is therefore to be divested. Otherwise, it is usually not done for competitive reasons. In this case, a liquidation value would have to be applied to the property, which in simplified terms describes the land value less the costs of clearance (building demolition, refurbishment) (Kleiber & Simon, 2007, S. 1397). In extreme cases, the costs of clearance due to hazardous waste disposal or remediation of contaminated sites can exceed the land value. In fact, such situations are comparatively common, particularly in the industrial sector with sites in peripheral locations or in remote regions, which are ultimately associated with very low land prices. In practice, a value-based approach for real estate is therefore not feasible in these cases.

14

2  The Basics of Corporate Real Estate Management

Fig. 2.4   BASF Ludwigshafen plant

However, these aspects of third-party usability, which are still easy to understand in the case of production and research buildings, can also apply to other types of real estate, e.g., office properties. On the one hand, for reasons of synergy, it can appear to make sense to erect administrative buildings on these very production sites, although there is no or hardly any usability for them by third parties in the event of reduced capacity utilization. On the other hand, there are sometimes company-specific requirements for a building that are derived from marketing concepts, representation requirements, or purposeful self-presentation (corporate identity) of the company. Despite an attractive location from the market’s point of view, these can make utilization possible only at a discount or even impossible altogether due to very (owner-) user-specific structural features. Administrative buildings at production sites, therefore, only make sense if their longterm use is assured based on sustainable in-house demand or subsequent use by third parties for other purposes. This is most likely to be ensured if the administrative functions are only for production itself. Additional functions (sales, marketing, and, in particular, classic headquarters and back-office functions) inflate the space requirements for such buildings disproportionately and are often subject to requirement fluctuations, which are independent of production. In this respect, the possible synergy effects (cost savings) must be weighed against the utilization risk (vacancy costs, value reductions). In principle, however, it must be accepted that such office properties can hardly be

2.6  The Marketability of Corporate Real Estate

15

brought to market when they fall vacant. They are, therefore, de facto special properties that are too risky for an external financier. As a result, such real estate is ultimately a burden on the core business as a cost item. If a CRE department wants to evolve from a passive manager of properties to a proactive manager of the portfolio, some further approaches are possible. These are essentially aimed at bringing the corporate real estate portfolio itself a little closer to the traditional market. In principle, this can be done by selecting an appropriate location and by defining the construction and fit-out standards, taking into account the potential for third-party usability. However, in the discussions about these very aspects, the ambitious CRE manager quickly comes up against his internal tenant market, and wrongly so, as a differentiated look at the real estate portfolio shows. Figure 2.5 shows the possibilities of the individual types of real estate (asset classes) with regard to their standardizability, externalizability in management (outsourcing), and third-party usability (Glatte, 2014, S. 17). It is certainly true that more complex production facilities as well as productionrelated infrastructures can only be built in designated areas, and usually in very peripheral outlying locations, if only for purely legal reasons. Moreover, these are usually very strongly linked to specific production processes and thus almost impossible to standard-

Property type

Classification

Standardizability

Externalization of management

Third-party usability

Free & traffic areas Administrative buildings Commercial properties

Simple nonproduction properties

hoch high

simple (noteinfach critical for core (nicht business)

hoch high

Warehouses Social buildings Lab buildings Buildings for pilot plants Factory halls Hazmat stores Supply and disposal buildings Complex production

Complex nonproduction properties Production and related properties

mittel medium

hoch high

Special properties

Fig. 2.5   Marketability of corporate real estate

low

limited eingeschränkt (somewhat (bedingt critical for kerngeschäftscore kritisch) business)

schwer difficult (critical (kerngeschäftsfor core kritisch) business)

limited

low

16

2  The Basics of Corporate Real Estate Management

ize. Third-party usability is therefore virtually non-existent and often undesirable for competitive reasons. However, the situation is more differentiated for other types of real estate. Even normal factory halls and laboratories can be of interest to third parties, provided that they have a suitable commercial or industrial environment. For this to happen, however, the buildings must already be spatially positioned at the time of site selection and built in a way that is suitable for the market or allows for easy conversion. This requires that the criteria and requirements of the traditional real estate market be taken into account from the outset in the choice of location, the planning of the plant, and the final construction design. However, this requires knowledge of the market as well as the insight that, although real estate is a long-term investment, it is not meant for eternity—neither from the point of view of the utilization concepts nor from the point of view of the utilization itself. These considerations usually play very little role from the perspective of a company’s core business. After all, business plans with a negative outcome have little prospect of management support. The way exit scenarios are dealt with, therefore, also shows to a certain extent the maturity of the CREM organization in an industrial company. The aim here is not to turn the internal tenant market into a renters’ market, but to strike a sensible balance between the interests of the core business and the realities of the real estate business.

2.7 Time Availability of Corporate Real Estate This is immediately followed by the question of the availability of the property in terms of time. The problem of the time factor is described in detail in Sect. 3.5. Previously mentioned types of return are also subject to a time aspect: • Initial yields are subject to a reporting date • Property and investment returns always relate to specific periods under consideration. A professional real estate investor will make their investment as a whole, but in particular the timing of the investment, directly dependent on the latter aspects, relying on sound research and a feasibility analysis based on it. Of course, this also applies to an investing company. However, its feasibility analysis will not focus on the cycle of the real estate market. Instead, concerning the aforementioned time-specific aspects—market cycle, investment period, etc.—the investment is, of course, primarily guided by the needs of the core business. Real estate-specific aspects are only one component of the overall view. In practice, it is quite common for an investment to have to be made at a very unfavorable time in terms of the real estate market because this is required by the core business (which determines the process). Market cycles of the core business and the respective real estate

2.9  The Goals of Corporate Real Estate Management

17

segment do not usually correlate or, as experience has shown, are rarely in a favorable constellation for the overall investment. This is particularly noticeable in developing and emerging countries, for example, where potential investors are usually also confronted with disproportionately high land prices and high construction costs due to high demand during the years of an investment. Nevertheless, a company will make the investment if the overall economic viability of the project can be demonstrated or if there is a strategic necessity. The comments in this Sect. 2.7 once again emphasize the economic significance of dealing with corporate real estate and, as a result, the economic relevance of a careful and technically correct choice of location for production facilities.

2.8 User Satisfaction and Productivity as Key Performance Indicators Another qualitative indicator of success is user satisfaction. This is directly correlated with user productivity, which is a quantitative indicator. A study by the Technical University of Darmstadt determined productivity deviations of up to 20 percent with regard to the existence of different area concepts alone (Krupper, 2011, S. 26). However, in order to leverage productivity gains, changes in traditional space utilization concepts and thus also in operational processes, hierarchy concepts, personnel concepts oriented to the allocation of supposed status symbols (e.g., individual office, parking space, etc.), and the availability of IT tools are inevitable. This again demonstrates the need for feedback between real estate management strategies and overall corporate requirements. Success in this regard can only be achieved with a holistic approach, in close cooperation with other functional units such as HR and IT, and their specialist sub-strategies. It is precisely in these areas that there is the greatest overlap between the objectives of a professional CREM and a proactively operating core business. Both internal stakeholders are pursuing the same goals here. Based on this, it can be summarized that, despite the fundamental strategic guidance competence of the core business, an alignment between corporate and real estate strategy is essential for the efficient handling of real estate as an operating resource in terms of business management and human resources, and thus ultimately for overall corporate success.

2.9 The Goals of Corporate Real Estate Management The potential for savings becomes particularly clear when one considers that numerous companies still do not have an active real estate and property management system or have only implemented it professionally to a limited extent. The first approaches were usually made in the operational phase of the property with the help of the implementa-

18

2  The Basics of Corporate Real Estate Management

tion of professional facility management. However, this is only the first step on the way to a comprehensive, holistic view of industrial real estate in terms of cost optimization. There has been a drastic move away from traditional property management on the one hand and facility management on the other toward an independent support function within the company. However, most companies still have a long way to go to develop an independent corporate business unit or at least a profit center with market-oriented management—as was often propagated in the specialist literature in the 1990s from the shareholder perspective. It is also doubtful whether this is really still CREM or not already institutional real estate management. In this sense, one speaks today of corporate real estate management, in which an (internal) user advantage and an economic contribution to the company’s success take center stage. If the focus is now on economic corporate success (i.e., a contribution to corporate profit), companies with existing sites, especially industrial companies, have three options: • recognition and realization of value enhancement potential for properties not essential for operations (neo) • recognition and exploitation of cost reduction potentials for properties essential for operations (eo) • recognition and implementation of the sustainable further development of the existing portfolio of real estate essential for operations (eo) for future requirements (new processes in production; logistics; new working environments; influences of digitalization; requirements from legal constraints; etc.). However, the difficulty of CREM is to exploit the above-mentioned opportunities and realize added value from them without changing or otherwise affecting the company’s core business. In addition, the aim is to achieve an optimum for locations to be newly developed through: • lowest possible vacancy rate • expandability • flexibility and adaptability to changes in the company, and • securing long-term third-party usability. The aim is still to strengthen the profitability of the company as a whole and thus make an important contribution to its success. In this context, CREM focuses less on the individual property and more on the entirety of the company’s real estate and properties. The real estate area can support the fulfillment of operational and strategic corporate goals by various detailed tasks that result from the above-mentioned general points: • avoidance of vacancies (unused or redundant)

2.10  Corporates’ Real Estate Portfolios

19

• increase and optimization of utilization efficiency (utilization of infrastructures and energies, land use, etc.) • securing necessary expansion options at minimal cost • generating cash flow • tax optimization by taking advantage of the available benefits • contract management and creation of contractual frameworks that enable the following: – maximum flexibility – minimum costs – minimal liabilities or obligations. • balanced risk assessment and risk avoidance • securing long-term utilization potential by ensuring the greatest possible marketability and third-party usability of – selected location and – selected structural design.

2.10 Corporates’ Real Estate Portfolios 2.10.1 The Size of Corporate Real Estate Portfolios Although the core business of so-called corporates focuses on all kinds of activities, most of them still own a quite considerable real estate portfolio. There are various surveys that support this statement. For example, based on the monthly reports of the German central bank (Deutsche Bundesbank), Schulte calculated that real estate accounts for approx. 10 to 12 percent of the total assets of German companies (Schulte & Schäfers, 1998, S. 41). An example of the value of these portfolios per company can be seen in Table 2.1, which lists the real estate assets of the DAX 30 companies in 2004. Since the publication of this book, there have been only comparatively marginal changes in the size of these assets.

2.10.2 The Composition of Corporate Real Estate Portfolios In the course of a study conducted by the Research Center for Corporate Real Estate at Darmstadt Technical University on behalf of the CoreNet Global trade association and the Central Real Estate Committee, the composition of the real estate portfolios of corporates was examined in 2014, among other things (Pfnür, Die volkswirtschaftliche Bedeutung von Corporate Real Estate in Deutschland, 2014). The results are summarized below.

2  The Basics of Corporate Real Estate Management

20

Table 2.1  Real estate portfolios of DAX 30 companies (2004 and 2016) Book values [billion €] 2004

2016

Acquisition-costs [billion €] 2004 2016

Adidas

–

1.0

–

1.4

Alliance

16.7

3.1

Unknown

4.0

BASF

2.4

5.3

6.2

11.3

Bayer

3.3

4.8

8.0

10.3

Beiersdorf

–

0.4

–

0.8

BMW

3.4

6.2

5.6

10.9

Commerzbank

0.9

0.4

1.0

0.9

Continental

0.9

2.8

1.6

4.5

Daimler

11.4

8.0

21.0

16.8

Deutsche Bank

3.6

1.9

–

4.3

Deutsche Börse

–

0.0

–

0.1

Deutsche Lufthansa

0.8

–

1.5

–

Deutsche Post

5.3

2.5

7.4

4.8

Deutsche Telecom

9.6

7.0

17.6

18.5

e.on

11.9

1.8

18.7

3.8

Fresenius

–

3.9

–

6.6

0.8

1.5

1.2

3.2

–

6.9

–

9.7

Henkel

0.8

1.1

1.6

2.2

HVB Group

2.5

–

3.9

–

Infineon

0.5

0.4

1.1

1.1

Linde

1.0

1.5

1.9

3.0

–

1.3

–

2.7

Fresenius Medical Care Heidelberg Cement

Lufthansa MAN

1.1

–

Merck

–

2.0

Metro

8.8

–

12.1

–

Munich Re

1.4

2.4

2.1

3.6

–

0.1

–

0.1

RWE

8.2

2.9

13.7

7.3

SAP

0.7

1.1

0.9

–

Siemens

4.6

4.2

9.2

7.9

ThyssenKrupp

4.6

0.3

7.7

0.4

TUI

1.3

–

1.8

–

Volkswagen

7.2

19.6

13.7

33.5

ProSiebenSat1 Media

2.2 –

– 3.4

(continued)

2.10  Corporates’ Real Estate Portfolios

21

Table 2.1   (continued) Book values [billion €] 2004 Vonovia

–

2016

Acquisition-costs [billion €] 2004 2016

0.1

–

0.1

Fig. 2.6   Real estate portfolios—breakdown by type of use

Values of CRE Real Estate Portfolios The aforementioned study determined a value of corporate real estate (see definition in Sect. 2.3.2) of any kind amounting to just under EUR 3 trillion. Of this, approximately EUR 500 billion is accounted for pro rata by land values (Pfnür, Die volkswirtschaftliche Bedeutung von Corporate Real Estate in Deutschland, 2014, S. 17). Broken down by type of use, the picture is equally interesting. According to the study, 22 percent of corporate real estate is factories and workshops (EUR 660 billion), and 35 percent is retail and warehouse buildings (EUR 1.05 trillion). It can be deduced from this that industrial real estate (see definition in Sect. 2.3.2), with a share of 57 percent or a value of EUR 1.71 trillion, accounts for well over half of corporate real estate assets in Germany (see Fig. 2.6). Ownership Rates of CRE Portfolios According to an analysis by the Research Center for Corporate Real Estate Management at Darmstadt Technical University, the ownership rate among German companies is 68.9 percent (Pfnür & Weiland, 2010, S. 41). While this represents a slight decline

22

2  The Basics of Corporate Real Estate Management

from just over 70 percent in 2002 (Pfnür & Armonat, 2004, S. 42), Germany still lags far behind the U.S. at approx. 30 percent, the UK at approx. 55 percent, and Asia at 20 percent (Pfnür, 2010). A look at the distribution of ownership rates by asset class in Fig. 2.7 clearly shows the problem: in particular, the asset classes grouped together under the term industrial real estate have an above-average ownership rate (Pfnür, 2014, S. 32). The reasons for this are the factors described in Sects. 2.4 and 2.6 for corporate real estate.

Fig. 2.7   Ownership rates by type of use

3

The Basics of Project Development

3.1 Project Development—Conceptual Definition and Delimitation DIN 69,901 clearly defines the term project as “… an intention that is characterized essentially by uniqueness in its general conditions in its totality” (see DIN 69,901–5 “Project Management—Project Management Systems—Part 5: Terms”, Deutsches Institut für Normung, January 2009). Regarding the conceptual definition of project development, there are quite unclear, diverse, and sometimes quite controversial ideas in the literature, which do not allow for a uniform and clear description and delimitation of the project development activity. Time and again, this problem is pointed out in the literature. The following are some examples from the literature. Kyrein’s Definition “The purpose of project development is to combine the factors of location, project idea, and capital in such a way that individually competitive, job-creating and job-securing, as well as macroeconomically, socially and environmentally compatible real estate properties can be created and used profitably in the long term”(Kyrein, 1997, S. 78). Diederichs’ Definition “The purpose of project development is to combine the factors of location, project idea, and capital in such a way that individually competitive, job-creating and job-securing, as well as macroeconomically, socially and environmentally compatible real estate properties can be created and used profitably in the long term” (Diederichs, 2006, S. 5).

© Springer Fachmedien Wiesbaden GmbH, ein Teil von Springer Nature 2024 T. Glatte, Location Strategies, https://doi.org/10.1007/978-3-658-42417-6_3

23

3  The Basics of Project Development

24

According to Kyrein’s definition, we can speak of project development in the narrower sense, which includes all areas of work, from the project idea to land acquisition and obtaining a building permit. Diederichs’ definition describes project development in a broader sense, which includes construction project management and facility management (see Fig. 3.1). This interpretation is shared by DVP (German Association of Project Managers in the Construction and Real Estate Industries) (DVP, 1994). The background to this conceptualization is a reference to the life cycles of real estate (Schulte & Bone-Winkel, 2002, S. 32).

3.2 The Objective of Project Development The central objective of project development is to bring about an increase in the value of a property—as land or as a building. In the course of the project development process, it is important to identify all potential for value enhancement. To this end, the respective opportunities and risks must be analyzed and weighed up in order to ultimately leverage the appropriate value enhancement potential.

Projedt development in the narrower sense

Project trigger / initial Planning Construction (Marketing)

Building management or facility management Project development in a broader sense

Fig. 3.1   Project development terms

Use Repurposing / demolition

Project management

3.3  The Project developer’s Environment and Role

25

3.3 The Project developer’s Environment and Role The professional environment of the project developer is extremely multi-layered and complex. Even smaller projects have numerous stakeholders, such as: • • • • •

the authorities (holders of planning sovereignty) the banks the neighborhood or the public the ultimate users (for corporates, the internal users, e.g., business units) the owners of the land.

Working in this environment requires a high degree of perseverance, the ability to reach consensus, and creativity, since only in the rarest of cases do all stakeholders assess the project in the same way and unanimously endorse it. Usually, dissent and conflict are logical and therefore inevitable, simply because of different perspectives and interests— economic, ecological, as well as social and cultural (Fig. 3.2). In this environment of tension, project developers often act not only as the driving force for the project, but also as mediators between a wide variety of professional groups such as economists, lawyers, architects, and engineers, and, ultimately, the people carrying out the construction (Fig. 3.3).

Politicians

Citizens or local residents Authorities

Media

Project developer

Financing banks Future users

Current owner of property

Investors

Fig. 3.2   Environment of the project developer (stakeholder perspective)

3  The Basics of Project Development

26

Economists

Legal experts

Contractors

Project developer

Engineers

Architects

Fig. 3.3   Environment of the project developer (qualification)

Therefore, the project developer is required to have technical, commercial, and legal skills in roughly equal measure. In addition, coordination skills, management skills, and often political acumen are needed.

3.4 The Project Development Process The process of real estate project development—following the definition of project development in a narrower sense—can be divided into three main stages: • project initiation • project conceptualization • project concretization. Project initiation is essentially the identification phase of a project. This is where the framework conditions for the project are defined, and the first basics are determined. Project conceptualization consists essentially in the feasibility study. Project concretization comprises all measures up to the beginning of the project’s realization. Project realization as well as subsequent marketing, as components of a project development in the broader sense, are deliberately excluded here.

3.5  The Initial Phase

27

The entire project development process is structured according to the three aforementioned phases, and an overview of the process, together with the main sub-phases, is shown in Fig. 3.4 (Schulte & Bone-Winkel, 2002, S. 40). The process of developing and establishing new production sites can be regarded as project development in the narrower sense as defined by Kyrein (see Sect. 3.1). Therefore, it can be sketched as shown in Fig. 3.4. The individual phases will be discussed below, with the focus on the case of a new settlement of industrial projects.

3.5 The Initial Phase 3.5.1 Basics The initial phase comprises “… the totality of activities and processes for the formal initialization of a project” (DIN 69,901–5). Basically, there are three possible initial triggers for a project:

PROJECT INITIATION

New development

Development in existing portfolio

Rough description of project (project definition) and initial, simple project development calculation

PROJECT CONCEPTUALIZATION Feasibility analysis Market analysis

Location analysis

Utilization concept

Risk analysis

Profitability assessment

PROJECT CONRETIZATION

Decision on execution

Definition of project partners

Permit planning

Conclusion of contracts

PROJECT REALIZATION

Fig. 3.4   Project development process

Property acquisition

Securing of project and property

Time factor

3  The Basics of Project Development

28

• (project) idea • location • capital (the means of financing).

3.5.2 Possible Constellations of Project Triggers Regardless of the type of project, these three triggers, in different constellations to each other, can initiate a project (Schulte & Bone-Winkel, Handbuch Immobilien-Projektentwicklung, 2002, S. 41 ff.). These constellations are shown in Fig. 3.5. Constellation (II) is the most common form of project development in the real estate industry (LaGro Jr., 2008, S. 15). Usually, a plot of land already exists or is in prospect. In this case, it is up to the project developer to demonstrate a successful development of the site by means of a concept that is as marketable and economically viable as possible. In the case of non-property companies (companies whose core business does not focus on the development, operation, and utilization of real estate), it is often the task of a professional corporate real estate management (CREM) unit to make use of so-called properties not essential for operations (neo). This is often an approach for project development under this constellation. Constellation (III), in contrast, is the classic case for fund investments in which the achievable return is of primary interest, while the type of investment, as well as the loca-

CONSTELLATIONS OF A PROJECT DEVELOPMENT Legend: X = available O = not available, i.e., to be procured

Factors (Project) Idea

Site

Capital

Constellation (I)

X

O

O

Constellation (II)

O

X

O

Constellation (III)

O

O

X

Fig. 3.5   Constellations of triggers of a project development

3.5  The Initial Phase

29

tion itself, are of secondary concern as long as the return targets of the fund investors are achievable. However, only constellation (I) is relevant for the analysis to be conducted here. For companies, especially so-called non-property companies and thus also industrial companies, there are different factors, interests, and other reasons that influence a settlement at a specific location: a) economic • market analysis and resulting growth potential • lower production costs • reduction of logistics costs • taxes and duties • investment incentives (subsidies, tax models, etc.) b) strategic • securing/increasing market share • role of competitors in the market • long-term expectations regarding the market c) legal • legal situation (legal security) • simplicity versus complexity of legislation • tax legislation (attractive framework conditions) d) political • stability • political ethics • business ethics.

3.5.3 The Time Factor In the above-mentioned constellations, however, the time factor should also be taken into account. Here, a distinction must be made between the time aspect as a • period or • point in time. With regard to the period factor, it should first be noted that land is not subject to any change in the sense of a consumption of value within an economically manageable period of time. Thus, in principle, land has an unlimited lifetime. In contrast, however, there are a number of external changes related to real estate that occur within certain time periods, for example:

30

3  The Basics of Project Development

• • • •

real estate objects change over time (use, change in demand) gain/loss in value over a certain period of time investment horizon for investors willingness of investors to commit to projects for a certain time (or drop them after a certain time).

Furthermore, the point in time considered in each case, the so-called timing, is also important for project development (Schulte & Bone-Winkel, 2002, S. 71). This is based on the existence of problems such as: • (real estate) life cycles • (real estate) market cycles • time lags for – investment evaluations – decision making – planning services – construction, etc. The temporal influence is illustrated in Fig. 3.6, with the example of rents for office properties in premium locations in the key European office markets over a period of five years. This chart is particularly interesting with regard to the shift between Q3/2008 and Q3/2009, which illustrates the distortions in the wake of the financial crisis that began at the end of Q3/2008. Such data are compiled quarterly by major real estate consulting firms and compared over the course of several years. The example in Fig. 3.6 shows the comparison of the third quarters from 2006 to 2010 by Jones Lang LaSalle (JLL, Januar 2011). The development and bursting of a real estate industry “bubble” can be seen very clearly.

3.6 The Conceptualization Phase 3.6.1 Basics After the project has been roughly outlined in the initiation phase, the next stage is to examine it for feasibility on the basis of detailed and systematic analyses (LaGro Jr., 2008, S. 60). These detailed analyses are directed at: • the market and the competition • the location • the production or settlement concept, with – the production concept for companies willing to settle in the region and

3.6  The Conceptualization Phase

31 Q3 2006

Q3 2010

London City, London West End Moscow Dusseldorf Oslo, Paris, Stockholm

Q3 2007

Madrid Barcelona, Luxembourg Hamburg, Athens Budapest, Edinburgh, Rome Bucharest, Brussels, Frankfurt, Lisbon, Stuttgart Amsterdam, Copenhagen, Dublin, Prague Milan Geneva, St. Petersburg

Berlin, Helsinki, Istanbul, Kiev, Lyons, Munich, Warsaw

Explanation:

Q3 2009

Decreasing rent increases

Increasing drop in rents

Increasing rent increases

Decreasing drop in rents

Q3 2008

Fig. 3.6   Cycles of the office real estate market in Europe 2006–2010

– the settlement concept and the focus on trade in the case of industrial areas seeking to attract new business • the potential risks • the economic viability or the so-called added value of the project. These detailed analyses are closely interwoven and interdependent. They are usually summarized under the umbrella term feasibility study. The feasibility study is a particularly important and—especially in the case of industrial projects—very complex component of the project development process, since it takes into account not only the goals of the industrial company, but also the interests of all other parties involved or affected, including the public. The objective of a feasibility study is to examine the industrial project in terms of its feasibility within a certain time frame, namely • under consideration of possible problems in – economic – technical – social and – legal respect

32

3  The Basics of Project Development

as well as • taking into account the existing resources of the industrial company in – financial – personnel and – technological respect. However, even if the results of all the above analyses are positive, a feasibility study cannot guarantee the ultimate success of the project. It merely helps to determine, highlight, and evaluate the project risks.

3.6.2 Market and Competition Analysis A fundamental and first step for a project is a detailed investigation of the target market. Since the scope or volume of any market is a finite quantity, this analysis of course automatically includes an examination of the behavior of direct and indirect competitors toward that market as well as in that market (Scott, 2001, S. 171). It goes without saying that only a settlement that pursues a strategy adapted to the competitive situation of the respective industry as well as the individual company will be successful. Particularly in the area of industrial production, which in contrast to the financial markets, for example, is less characterized by short-term windfall effects, this is essentially understood to mean a sustainable contribution to the success of the company. Therefore, short-, medium-, and long-term trends must be analyzed in detail and the necessary measures initiated on the basis of this analysis (Abele, Kluge, & Näher, 2006, S. 151). Short-term changes in market share are characterized by particular USPs of a current product portfolio. This can be seen, for example, when new products or models are launched (example: automotive production). In this case, however, the overall market itself remains essentially unchanged. Medium-term changes in markets are seen in particular as cyclical changes, e.g., economic or industry-specific business cycles. Long-term market changes, in contrast, have structural causes. These trends are of particular importance for companies. Early recognition of these trends and the introduction of forward-looking measures not only ensure the continued existence of the company but may also create significant competitive advantages. For a company seeking a site, it includes • the identification of development potentials and risks • the current and potential future position of competitors in the market and • the resources available at the time.

3.6  The Conceptualization Phase

33

In turn, for a location seeking to attract companies, this means a careful evaluation of its own environment and the possible potential and advantages for companies wishing to locate there. It is essential, especially for an existing location that, for example, wants to attract companies or wants to be attractive for other reasons, to: • • • • •

identify its own position in the market benchmark itself against potential competitors thereby realistically identifying advantages and disadvantages and thus, ultimately identifying the target group that is interesting for itself and examine this regarding – its current economic situation and prospects – the industry-specific requirements and interests as well as – its strategic alignment.

New locations have the advantage that they can be created in the sense of the previously identified target group. For both, however, the market study is extremely important with regard to the necessary orientation and marketing.

3.6.3 Site Analysis There are basically two options for a commercial or industrial settlement (LaGro Jr., 2008, S. 15): • establishment at an existing location (brownfield site) and • establishment at a new location to be developed, if necessary, at a so-called “greenfield site”. It can be assumed that approx. 60 to 80% of the newly invested production capacities still go to the expansion of existing production sites and that only less than 40% of the investment volume goes to the construction of new sites (Stafford, 1980, S. 12 ff.). Irrespective of this, however, for both options, a detailed site analysis is always the basis for the final location decision for the investment. The times when the expansion of existing production capacities was an automatic reaction in the face of rising demand are long gone. This is especially true in today’s age of globalization. Not only every single new investment that goes beyond normal maintenance of existing facilities is scrutinized regarding its optimal location; existing production capacities are also regularly scrutinized with regard to their current location, i.e., a constant analysis process is underway in this case too. This is one of the reasons for the numerous relocations from Western industrialized nations to the emerging markets of Eastern Europe, Asia, and Latin America in recent decades.

3  The Basics of Project Development

34

3.6.4 Analysis of the Production Concept For industrial site search, it is also necessary to analyze on the production side which production methods and production processes are to be used or can be used at the planned site. The basis for this should be a strategic production concept which compares the existing production capacities and processes (current situation) with the requirements of the market and competitor analysis mentioned in Sect. 3.6.2 (target situation). There are a wide variety of strategic approaches to be analyzed for this purpose. A distinction can be made between various basic tendencies, each of which is characterized by further individual tendencies (Schmigalla, 1995, S. 52 ff.). These are considered individually below. Approaches (Basic Tendencies) for Strategic Production Concepts a) Shifts between seller’s market and buyer’s market with the following individual trends: • cost-effective mass production requiring the exploitation of economies of scale • innovation-intensive production based on special customer requirements with a high number of variants • shorter delivery times with ever shorter product life cycles • increased quality requirements that demand a higher level of quality management • more environment-friendly production, which requires a stronger focus on waste reduction, recycling, and disposal. b) Development from national to international market with the following individual trends: • reduction of the vertical range of manufacture • optimization of suppliers in terms of number and competence • increase of vitality, stability, flexibility, and variability of production • change in factory structure and internal division of labor • change in management hierarchies • adjustment of the PPS systems (production planning and production control systems) to changed management hierarchies and factory structures • development of the company’s self-image, behavior, and culture, e.g., corporate identity, corporate design, corporate image, etc. • holistic corporate change according to strategic concepts, e.g., lean production • continuous improvement processes (e.g., KAIZEN) • transfer of best practice models across cultural boundaries. c) Development from a polluting to an environmentally friendly factory with the following individual tendencies: • implementation of the precautionary principle, i.e., early prevention of environmental pollution already at the origin

3.6  The Conceptualization Phase

35

• implementation of the polluter-pays principle, i.e., costs borne by the party causing environmental pollution • change from waste to circular economy, i.e., assumption of product responsibility by the manufacturer of products that the user will dispose of • increased proof of the environmental compatibility of production to the point of eco-auditing • reinforcement of holistic sustainable development concepts with implications for the manufacturing process. In the course of the internationalization of the production process, a distinction can again be made between two approaches—the incremental and the eclectic approach, which are explained below (Gerbach, 2006, S. 46 ff.). Approaches for the Internationalization of Production Processes a) Incremental approach This is an evolutionary approach to the internationalization of business activities. In this approach, it is assumed that a company gradually develops foreign markets by starting initial activities with a low input of resources and, after successful testing, successively expanding its resources, and thus also its operative activities. A classic example of this was the market entry of large industrial companies in China during the 1980s and 1990s (see also Sect. 4.4). After Deng Xiaoping began opening up the People’s Republic of China in 1980, many companies first established a branch in Hong Kong. On the one hand, the then British crown colony offered the status of high legal security and financial stability. On the other hand, the Chinese market could be explored from here via the neighboring Chinese special economic zones in Shenzhen and Zhuhai at a comparatively low risk, e.g., via marketing and sales activities. The next step was usually to set up a joint venture with a Chinese partner. The local partner contributed market knowledge, especially concerning business and sales structures as well as regulatory approval processes, while the foreign partner introduced experience with production technologies, production processes, management and, in the early years, financing options. As a result of the foreign investors’ increasing experience and knowledge in the Chinese market, the joint ventures then became increasingly redundant towards the end of the 1990s. The foreign investors then increasingly resorted to the model of a company wholly owned by a foreign investor, WOFIE for short, in established segments (Glatte, 2004, S. 473). b) Eclectic approach In addition to the incremental approach, which examines the (evolutionary) behavior in the internationalization of manufacturing activities, a decision-oriented perspec-

3  The Basics of Project Development

36

tive can also be used. This is also referred to as the eclectic approach to explaining internationalization (Dunning, Towards an Eclectic Theory of International Production—Empirical Tests, 1980, S. 9 ff.). In this approach, the forms of market entry are examined and why these forms are chosen, e.g., • export • licensing • production abroad. These considerations are most common in practice (see Sect. 4.4). Basically, the decision for a foreign activity is examined on three different levels in this context, i.e., with regard to the • ownership benefits: Specific resources are owned by the company and can lead to a competitive advantage (Dunning, 1993, S. 34 ff). These can be tangible as well as intangible resources, e.g., products, patents, technologies, know-how of any kind, real estate, etc. • location advantages: Weighing up opportunities and risks regarding the factors for a cost-efficient production location abroad. • internalization benefits: Weighing up the advantages of in-house realization (internalization) through a foreign direct investment against an external solution (externalization), e.g., through licensing, franchising, contract manufacturing, etc. It can be noted that companies maintain a production facility abroad only as long as the triggering special location advantages, and here in particular the cost advantages, exist compared to other countries. This fact was already studied in the late 1970s by Dunning (Dunning, 1980, S. 11 ff.). In the phase of strategic production process conceptualization, it must also be questioned how many production sites are actually needed or make sense; in extreme cases, very different complexities can be juxtaposed with each other. It should be noted that companies pursue very different concepts for strategically positioning their production sites. There are different approaches for globally positioned production networks (Abele, Kluge, & Näher, 2006, S. 170 ff.). These can be structured in a simplified way as follows (Fig. 3.7): • • • • •

the world factory the production chain the production network the hub-and-spoke principle individual and locally set up production.

3.6  The Conceptualization Phase

Economies of scale and economies of scope

High

37 Locaon and factory

Hub and Spoke World factory Factories deliver globally

Chain Concentraon along producon stages

Economies of scale and local presence

Producon process or producon stage

Local Local producon for the local market

Network Tightly woven global network

Low Low

Significance of local adjustment and of transac onal costs

High

Fig. 3.7   Structures of global production networks (according to McKinsey/PTW)

On the one hand, there is the so-called world factory. All customers are served globally from this location alone. All production competencies are pooled at a single location. This obviously allows for maximum synergies in production to be leveraged through economies of scale and economies of scope. On the other hand, there are small manufacturing sites whose production is purely local. Such sites can also be found in companies with global operations. These are often customer-oriented production facilities that are tailored either to a specific customer or to a very narrowly defined group of customers. The automotive industry is a good example of this. In this sector, suppliers deliberately choose locations close to their customers to be able to deliver just in time, and to be able to react very quickly with technical services and product modifications. The advantages here are the pronounced flexibility of internal and external processes, especially with regard to the customer. However, disadvantages often include higher logistics, infrastructure and transaction costs, and possibly also controlling deficits. In between are the concepts of the production chain, the production network, and the so-called hub-and-spoke structure. The production chain involves the bundling of production at different locations along production stages or value chains. The production network relies on the close linking of otherwise clearly separated locations.

3  The Basics of Project Development

38

The hub-and-spoke principle, in turn, attempts to leverage certain economies of scale and synergies through concentration (hub) on the one hand, while allowing a local presence and customer proximity on the other (spoke). This can be achieved, for example, through centralized development and prefabrication and localized final assembly and technical customer support. When classifying the production to be considered for the choice of location, not only the expected economies of scale and economies of scope, but also the expected logistics costs and transport times as well as the need for local adaptation of the products play an essential role. This means that, primarily, the specifications and results of the market and competition analysis mentioned in Sect. 3.6.2, as well as the analysis of the production processes, come into play here. Examining the potential of existing sites makes sense, especially against the backdrop of duplication avoidance or of possible synergies and economies of scale. Another essential consideration, if applicable, is the analysis of alternative manufacturing technologies. This should do justice to the respective location alternatives. Particularly on an international scale, an important issue here is, among other things, the feasibility under the local conditions, which are sometimes quite basic, especially in developing countries, but also considerations regarding the safeguarding of the company’s own technological know-how. Furthermore, the production alternatives must be considered against the background of their economic efficiency at the respective locations regarding the individual production costs as well as production quantities. Ultimately, therefore, the following points must be ascertained and checked in the course of the strategic conceptualization of production processes: • • • • • • •

location of the production sites type of production or manufacturing steps at these locations implications for suppliers and customers from these sites cost situation at the respective locations comparison of complex and simple site structures manufacturing technology appropriate for the location transfer and protection of patents, technologies, and know-how.

3.6.5 Risk Analysis The risk analysis is ultimately intended to ensure identification and assessment of potential project risks. These essentially relate to the important conditions discussed in Sect. 4.6 with regard to the different perspectives and described in detail in Chapter 5 using the example of macro-/micro-location factors, as well as to the extent to which these are actually available at the location.

3.6  The Conceptualization Phase

39

However, the definition of risk in the literature is rather inconsistent. Two examples are given below which show a different level of detail in the definition of risk. Risk Definition According to IDW-PS 340 (German Auditors’ Institute) “Risk is generally understood to mean the possibility of unfavorable future developments” (IDW, 1999). Risk Definition According to Gleißner “Risk is the possibility, resulting from the unpredictability of the future and caused by random disturbances, of deviating from planned goals” (Gleißner, 2004, S. 351). The above definitions are worded in very general terms and require more in-depth consideration. However, it can be deduced from both of the above definitions that a risk in the broader sense is an uncertainty for the project and thus for its success. The alternative to this would be an (absolute) certainty of prediction, i.e., freedom from risk. In decision-making processes, e.g., in the evaluation of action or location alternatives, such absolute certainty can only be achieved if perfect information is available. But it must be said that entrepreneurial activity is hardly compatible with freedom from risk, and thus uncertainty represents the normal case in real estate business activity (Maier, 1999, S. 6). This also applies to the process of a location analysis, since the degree of information availability only increases over the course of the process, but never reaches perfection (see Sect. 5.2). In a narrower sense, a risk exists if the decision-maker concerned can make statements about the probability of occurrence of the various disturbance variables relevant to the risk. For the decision-maker, this is therefore a (statistically/mathematically) calculable risk. If it is not possible to determine the probability of occurrence of disturbance variables, decisions must be made based on non-quantifiable, i.e., non-calculable risks. These are decisions made in uncertainty (see Fig. 3.8). Systematic and Unsystematic Risks Quantifiable risks can also be broken down into systematic and unsystematic risks (Hellerforth, 2006, S. 656). From the perspective of a portfolio with several properties, a systematic risk affects all properties equally. Unsystematic risks, in contrast, relate only to individual or very few properties. An unsystematic risk is, for example, the insolvency of a business partner, e.g., a supplier or construction company in the course of project development. The more business partners are involved in the project development process, the smaller the negative impact on the project in the event of the insolvency of a business partner. Conversely, this logically means that a higher number of project participants has a risk-reducing effect with regard to the disruptive factor of insolvency. The view of the overall risk of an industrial project as a combination of systematic and unsystematic risks is shown in Fig. 3.9 (Hellerforth, 2001). Despite an increasing number of plant investments, systematic risk remains constant, while the impact of unsystematic risks decreases.

3  The Basics of Project Development

40

CONCEPT OF RISK

Risk in a broader sense

Certainty

Uncertainty

Risk in a narrow sense

Uncertainty

quantifiable

non-quantifiable

Systematic risk

Unsystematic risk

Fig. 3.8   Structure of the concept of risk

This risk reduction is also called diversification from the perspective of a portfolio strategy. Examples of such unsystematic risks are the risk of fire or the risk of unforeseen costs due to unknown environmental pollution such as contaminated sites. Contrary to unsystematic risks, systematic risks cannot be reduced by diversification. One example is the risk of changes in capital market interest rates. Diversity of Risks In addition, factors such as exchange rate risks, but also political stability, play an essential role, although the list of potential risks can be extended in detail at will, depending on the industrial sector. An overview of potential risks for industrial project development can be found in Fig. 3.10 (Schulte & Bone-Winkel, 2002, S. 50). Regardless of the various definitions, however, it can be concluded that a risk is a fact that is oriented towards the future and cannot be concretely planned for. It thus represents a potential threat to the success of the project, which must be contained and limited. It is therefore the task and goal of risk analysis to estimate these imponderables and thus potential hazards, i.e., ultimately to quantify them. In this way, risks can be significantly minimized in connection with a well-prepared project development. To do this, all

3.6  The Conceptualization Phase

Overall risk

41

unsystematic risk

systematic risk

Number of plant investments Fig. 3.9   Overall risk of an investment

the main factors influencing the project must be brought together and analyzed for possible disturbance variables. Structure of the Disturbance Variables In this context it must be investigated • which risks are acceptable • which risks can be influenced, and • which risks cannot be averted. On this basis, a decision must then be made on how to proceed with such risks (see Fig. 3.11). Risk Assessment and Risk Distribution An essential part of the risk analysis is always the weighing and distribution of the possible project risks among the project participants. For active risk diversification, a distinction can be made between four different approaches (Berner, Kochendörfer, & Schach, 2007, S. 201):

3  The Basics of Project Development

42

Risk of (industrial) project development

Development risk

Assessment risk

Yield loss risk

Utilization risk

Value change risk

Cost overrun

Location risk

Market cycles in core business

Market cycles in core business

Location quality

Delay in Completion / construction

Market risk

Infrastructure costs

Property market cycles

Business cycle

Quality level

Financing risk

Credit standing of suppliers and customers

Useability by third parties

Shifts in global markets

Legal security

Changes in the form of accounting

Inflation

Operability

Changes in technology or processes

Taxation

Capital market

Environmental pollution

Fig. 3.10   Breakdown of selected risks of industrial projects

DISTURBANCE VARIABLES / RISKS

Acceptable

Influenceable

Unacceptable

Acceptance Not influenceable Unavoidable

Fig. 3.11   Risk management structure

3.6  The Conceptualization Phase

43

• risk avoidance (e.g., by excluding certain countries, markets, or locations) • risk reduction (e.g., by restricting the project to partners already known) • risk transfer (e.g., by targeted delegation of certain risks to other project participants such as contractors, banks, or coverage of certain risks by insurance companies) • risk acceptance (e.g., in the event of a low probability of occurrence or minor economic consequences). As already explained, it is not possible to achieve complete freedom from risk in project development. Similarly, minimization of certain risks can only be implemented to a limited extent without adverse effects. A redistribution of risks to other project participants is only possible to a certain extent and depends on their risk management as well as their willingness to participate disproportionately in risks. This can include aspects such as: • the unconditional will of the project participant to be awarded the order • the possibility of insurance solutions • the inclusion of risk in (the contractor’s) profitability, i.e., as a component of their profit and loss margin. In principle, therefore, the relationship between the project participants is a risk/ opportunity analysis in which a reduction in risks is often accompanied by a reduction in margins. Conversely, an increase in risk also leads to greater opportunities for higher margins. It should also be noted here that the certainty of project success or failure increases as the project progresses, i.e., uncertainty and the associated risks decrease. However, the possibility of counteracting certain influences also decreases as the project proceeds (Schulte & Bone-Winkel, 2002, S. 50). Risk Assessment For the purposes of an evaluation, risks can in principle be classified qualitatively by means of a comparison with projects of a similar nature (Dietrich R., 2005, S. 157). The basis for this is in particular the specifications of the basic definition in the initial phase of the projects to be compared. On this basis, models with changing scenarios can be set up. By means of a scenario analysis (see Sect. 6.6.2), target corridors can then be simulated in which the risks as well as the opportunities of a project development are likely to lie. A comparative view of markets can also be usefully presented as a form of risk analysis. In practice, investments are usually compared across countries based on the surcharges on the cost of capital to be achieved for the respective investment. Depending on the level of risk, e.g., based on a country rating, a surcharge is added to the required return in comparison with the home market (e.g., Germany).

3  The Basics of Project Development

44

The country reports of the EIU (The Economist Intelligence Unit Ltd—see also http:// www.eiu.com) are very good indicators in this respect, presenting both political and economic stability in a preference matrix and combining them in one evaluation. The 2004 EIU Country Report (see Fig. 3.12), for example, considered Russia to be comparatively problematic and risky, with slight advantages for economic over political stability (Abele, Kluge, & Näher, 2006, S. 131). This led to a recommended investment surcharge of +6% on the internal rate of return (IRR). The internal rate of return as a typical profitability indicator is the rate of calculation of a cash flow for which the net present value is equal to 0. In this case, an investor receives his invested capital back and the outstanding amounts bear interest at the breakeven rate.

3.6.6 Profitability Analysis The evaluation of the profitability of an industrial project systematically and purposefully assesses the economic consequences resulting from the realization of the project. Such investment calculations are designed in such a way that a computational comparability with other capital investments is possible. A wide variety of procedures, as described in Fig. 3.13, are available (Schulte & Bone-Winkel, 2002, S. 54).

Western Europe excl. Italy USA

Political stability

A

B

Poland

C

Brazil Bulgaria

Slowenia Slowakia Italy

B: limited risks • Interest surcharge of +2 % IRR

C: problematic but stabilizing • politically: only labor-intensive processes; +4 % IRR • economically: only exportable products; +4 % IRR

Russia

D

A: no material risk for international investments and transactions • all processes • no interest surcharge

China

E

D: Problems (usually strong market regulation) • only selected production processes; • surcharge: +6 % IRR

Ukraine

E

D

C

B

Economic stability

Fig. 3.12   Country preselection for production activities

A

E: Serious problems and high investment risk • no own production • potential base for purchasing

3.7  The Concretization Phase

45

Methods

classical methods

modern methods

static methods

dynamic methods

KPI systems of a complete budget plan (CBP)

cost comparison

capital value method

final asset value

profit comparison

equivalent annual cost method

withdrawal

profitability calculation

internal rate of return method

CBP profitability

amortization calculation

pay-off method

CBP amortization period

Fig. 3.13   Methods of investment calculation

In principle, each industry sector can expect quite different returns from its investments, measured among other things by the market situation of the respective industry. This ultimately also determines the expected return at which a project is considered worth implementing or not. Here again, there are major differences from one industry to another.

3.7 The Concretization Phase 3.7.1 Basics If the detailed analyses have shown the feasibility, i.e., an economic success potential, the project can now be concretized. This initiates the important negotiation and decisionmaking phase, which encompasses: • property acquisition • securing the supply of raw materials • securing supplies and disposal

3  The Basics of Project Development

46

• • • • •

obtaining building and operating permits awarding of planning and construction services securing of funding negotiating joint venture agreements with partners, if necessary, and other contractual commitments.

3.7.2 Building and Operating Permits Obtaining building and operating permits is another particularly critical step for industrial projects. The corresponding planning services—planning for execution and for permission to build as well as the specifications—must comply with local legislation and technical regulations. Despite early clarification of whether such industrial projects (e.g., petrochemical production) can be realized at all at the site, proof of justifiability must now be provided to the authorities and the public, which will then—hopefully—lead to a positive decision. Type and scope of verification are very country-specific and are usually very complex. However, there is often no guarantee of approval. The right to obtain a decision within certain deadlines, like in Germany, is also mostly unknown, especially in developing and emerging countries. This makes intensive political lobbying of the authorities necessary, especially in these countries. In comparison with local investors, foreign investors there are usually subject to significantly higher demands, especially in the field of environmental technology. This is usually clearly reflected in the scope of the environmental impact assessment to be prepared.

3.7.3 Engineering Planning Steps For the above reasons, the purely engineering planning steps have not been mentioned so far. They will be dealt with here, albeit in a very abbreviated form. Figure 3.14 shows a list of the engineering planning phases according to the AngloSaxon understanding (Harris & Ronald, 1995, S. 171). In principle, it is not surprising to find a structure reminiscent of the HOAI (the fee structure imposed on architects and engineers acting as public contractors in Germany). The project initiation phase is found here in the form of the task identification. During the project conceptualization phase with the feasibility study, the planning details are worked out up to the preliminary design. In the course of the project concretization, the detailed design/detailed engineering is prepared and the relevant contracts are negotiated, i.e., the construction works are tendered. If not already covered by the construction contract, this phase also includes the procurement of materials and industrial plants.

3.8  The Importance of Project Development in Industrial Companies

Stage

Task

Initiation

Identification

Preliminary Design

Feasibility studies, strategic and finance planning

Design and development

Engineering and costing

Detailed design

Detailed engineering

Tender

Contracts and procurement

Manufacture and construction

Manufacture and construction

Commissioning

Commissioning

Operation and maintenance

Operation and maintenance

47

Sequence of tasks

Fig. 3.14   Project phases according to the Anglo-Saxon model

3.8 The Importance of Project Development in Industrial Companies For many years now, one of the biggest restructuring processes in the world economy has been taking place, and Germany, in particular, has been deeply affected. This restructuring process also entails unusually high capital requirements. In this context, real estate has been recognized as an important resource in Germany—very late compared to Anglo-Saxon countries—and a start has been made to leverage its potential for the financing needs of companies. Whereas until a few years ago the corporate focus for improvement and cost reduction potentials was on production processes and personnel, we now see a total of five corporate resources (May, Eschenbaum, & Breitenstein, 1998, S. 3): • labor • capital

48

3  The Basics of Project Development

• technology • information • real estate. This is logical in that corporate real estate often represents one of the largest cost pools/a very large portion of corporate assets. Various empirical studies (e.g., Arthur Andersen: Wasted Assets? A Survey of Corporate Real Estate in Europe, 1995) have shown that in companies, real estate-related costs account for 3% to 10% of sales revenues and represent 5% to 15% of the company’s total annual costs (Schulte & Bone-Winkel, 2002, S. 40). These occupancy costs can be described as follows: “Occupancy Cost is the total cost incurred by a company to provide space for the operations of its business units. Occupancy cost can be divided into the costs of operation and costs of providing and maintaining the fixed asset” (National Association of Accountants, 1991, S. S. 2). In the course of this restructuring process, the handling of real estate as a resource has also changed significantly. The term real estate itself already indicates one of the decisive challenges: lack of mobility! Once a decision has been made in favor of a location, it is very difficult to reverse, and often only at a significant loss. This applies in particular to the search for a location to set up a new production plant. The location options to be investigated will certainly not be in sought-after inner-city locations, but in commercial and industrial areas on the outskirts of conurbations or, especially in heavy industry, in areas well away from attractive residential and administrative regions. In addition, in the case of new sites to be developed, the aim is to achieve an optimum of: • lowest possible vacancy rate • expandability and • flexibility and adaptability to changes in the company. The fulfillment of operational and strategic corporate objectives can be supported in this area through various detailed tasks derived from the general points mentioned above: • avoidance of vacancies (unused or redundant) • increase and optimization of utilization efficiency (utilization of infrastructures and energies, land use, etc.) • securing necessary expansion options at minimal cost • creation of liquidity

3.8  The Importance of Project Development in Industrial Companies

49

• tax optimization by taking advantage of available benefits • contract management and creation of contractual framework conditions, which enable – maximum flexibility – minimal costs and – minimal liabilities or obligations • balanced risk assessment and risk avoidance.

4

The Basics of Industrial Location Theory

4.1 The Term Location The discussion of the topic of determination and analysis of locations first requires a definition of the term location. For industrial enterprises, Karl-Werner Hansmann defines location as a “geographical place […] where the enterprise produces and/or utilizes products or services” (Hansmann K.-W., 1974, S. 15).

4.2 The Development of Location Theories Historically, the discussion of questions of site localization has its origins in the consideration of agricultural production units. One of the first comprehensive scientific works in this field in the German-speaking world is the 1826 book Der isolierte Staat in Beziehung auf Landwirtschaft und Nationalökonomie (The Isolated State in Relation to Agriculture and National Economy) by Johann Heinrich von Thünen (Thünen, 1921 (reprint)). The site structure model presented in this book shows the direct dependence of the achievable yield at a site and its intensity of use—a theoretical approach that is still valid today. In his work, however, Thünen explores the investigations published in the book An Inquiry into the Nature and Causes of the Wealth of Nations by Adam Smith from the eighteenth century and often refers to his results in his explanations (Smith, 1976 (reprint)). With the development of industrial manufacturing processes, the question of the right production location for industry arose. The theory for industrial locations was introduced in Germany by the national economist Alfred Weber (1868–1958), who published a first book on this subject as early as 1909, entitled Über den Standort der Industrien (On the Location of Industries) (Weber, 1909). It is true that Wilhelm Roscher (1817–1894) © Springer Fachmedien Wiesbaden GmbH, ein Teil von Springer Nature 2024 T. Glatte, Location Strategies, https://doi.org/10.1007/978-3-658-42417-6_4

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4  The Basics of Industrial Location Theory

52

had already dealt with this topic in the context of his work on location issues (Roscher, 1861). This also applies to Albert Schäffele (1831–1903), who, as an economist and politician, dealt with trade and socio-political issues (Schäffle, 1873). However, until Weber there was no theory of industrial location (Kiesewetter, 2000, S. 65). Weber examined location factors and location dynamics to “…unravel the tangle of orientation reasons that confronts us everywhere in reality” (Weber, 1909, S. 3). In doing so, Weber tried to set up his theory independently from specific economic systems. However, the only location problems he took into account were labor and transportation costs. A first attempt to find a theoretical approach to individual location types was made in 1951 by Meyer-Lindemann in his work Typologie der Theorien des Industriestandortes (Typology of the Theories of Industrial Location) (Meyer-Lindemann, 1951). Based on this, Behrens developed the concept further in 1960, designing an improved and supplemented system for the theory of industrial locations (Behrens, 1960). In the following years, Kaiser further elaborated on his ideas in various publications, e.g., Industrielle Standortfaktoren und Betriebstypenbildung (Industrial Location Factors and Company Type Formation (Kaiser, 1979). His work, which developed an overview of industrial location theories that is still valid today, is presented in Fig. 4.1 below (Kaiser, 1979, S. 19).

THEORY OF INDUSTRIAL LOCATIONS Micro-economic theory of industrial locations

Macro-economic theory of industrial locations

Theory

Technology

Theory

Technology

(historic location development Theory)

Location geometry models

Pure theory (location determination theory)

Realistic location determination theory

Historicalsociological location development theory

Theory of the objectives of optimized location design

Behavioral location theory

Location determination models based on modern mathematical methods (e.g. operations research)

Pure theory Behavioral location theory

Theory of active location design

Loation planning / location decision theory

Fig. 4.1   Systematics of the industrial location theory according to Kaiser

Hypotheses of empirical industrial location research

4.3  Location Strategy Concepts

53

Basically, however, building on Meyer-Lindemann, a distinction can still be made today between four basic forms of location theories: • Location determination theory examines the determinants that lead to a location choice. • Location effects theory examines the effects that result from a given location. • Location development theory examines the historical development of location structures. • Location design theory examines a wide variety of design options for spatial location distribution. The thematic focus is very different across these theories. Location determination theory is primarily characterized by business management and technical issues. Location design theory, in contrast, deals primarily with economic policy and macro-economic issues. The theory of location effects and the theory of location development are characterized by all of the technical aspects described above. In principle, the aim of location determination theory is to work out the relevant influencing variables for the choice of a location. With the help of certain evaluation procedures, a location decision can ultimately be made based on these factors. Based on the (pure) approach of location determination, there have been increasing studies in recent years on the decision-making processes themselves that led to the selection of the location. Here, the focus is less on the actual results of the site search, but rather on the assessment methods and evaluation models that brought about the decision. This approach is complementary to the theory of location determination, which is also referred to as location factor theory in other sources (Kappler & Wegmann, 1991, S. 220). This complementary, planning-oriented theory for the development of evaluation methods can therefore also be seen as an additional fifth location theory—the location planning theory (Goette, 1994, S. 50). In the context of this book, location determination theory is pursued together with location planning under the generic terms of site search, site analysis, or site evaluation. The other theories of location effect theory, location development theory, and location design theory are not considered further due to the thematic focus.

4.3 Location Strategy Concepts The conceptual orientation of the new site to be established is based first and foremost on the respective site strategy justifying the project initiative. There are different strategic approaches justifying a site search. Two fundamentally different concepts can be distinguished here (see Fig. 4.2): • stimulus-related strategies, and • implementation-related strategies.

4  The Basics of Industrial Location Theory

54

LOCATION STRATEGY CONCEPTS

Stimulus-related strategies

Implementation-related strategies

Cost-oriented location strategies

Acquisition

Market-oriented location strategies

Cooperation

Regulation-oriented location strategies

Self-investment

Fig. 4.2   Location strategy concepts

Stimulus-related strategies focus on the reasons that triggered or provided the stimulus for the site search. These reasons inform the main objectives for the site evaluation. Basically, three types of strategies can be differentiated: • cost-oriented location strategies • market-oriented location strategies, and • regulatory-oriented location strategies. The cost-oriented location strategies target possible cost reduction and thus savings potentials. The market-oriented strategies can, in turn, be directed at both the raw material and the sales market for the production to be established. The aim is either to gain access to raw material prices that are as favorable as possible or to develop sales potential, especially in foreign markets. Implementation-related strategies are based on the implementation philosophy that leads to a new location. A distinction must be made here between three types (Glatte, 2004, S. 473): • acquisition • cooperation • self-investment.

4.4  International Market Entry

55

An acquisition can take the form of the purchase of an existing site or merely of an existing production facility at a site (asset deal). However, it can also take the form of the acquisition of an entire company or shares in a company (share deal). The strategic approach of cooperation is usually expressed in the establishment of a joint venture or in strategic alliances (Goette, 1994, S. 46). This strategy has gained in importance, especially in developing and emerging countries, as the presence of a local partner with knowledge of the country’s customary practices, with contacts to the authorities for approval processes, with knowledge of existing distribution channels, and, under certain circumstances, also of existing personnel, has proven to be a decisive advantage, especially for initial investments in these markets (Glatte, 2004, S. 473). A self-investment is understood to mean a solution realized entirely without an entrepreneurial partner. Typically, however, the strategic approach of an acquisition does not involve a search for a location, but instead mostly a takeover of existing facilities and their subsequent integration and optimization (Glatte, 2004, S. 474). Similarly, the establishment of a strategic alliance tends to provide a basis for a partnership-based, possibly joint, approach to markets. In contrast, however, the establishment of a joint venture may well entail the establishment of a new site. The same applies to the concept of self-investment.

4.4 International Market Entry 4.4.1 Market Entry Approaches for Industrial Companies In the case of an industrial company, the first question when entering a market is whether exports or licensing are sufficient to achieve the desired market penetration or whether the market situation requires an investment (see also Sect. 3.6.4). Provided that a possible investment is seriously considered, it can be implemented in terms of an implementation-related location strategy as follows: • acquisition as an asset deal or share deal, or • cooperation with a company already active in the market, or • going it alone, e.g., by means of an independent new settlement. These alternatives are shown in the overview below (Fig. 4.3). All three options are weighed, if possible, according to the following business considerations: • • • •

presence of appropriate industrial facilities and their location construction time versus integration of existing structures market potential customer potential and sales structures

4  The Basics of Industrial Location Theory

56

DEVELOPMENT OF FOREIGN MARKETS

Growth targets

Rationalization targets

Definition of strategic orientation Export

Acquisition

Cooperation

No site search

Self-investment

Site search

Selection of company and / or property

Fig. 4.3   Opportunities for the development of foreign markets

• • • • •

advantages and disadvantages of joint ventures with local partners technology and patent protection competitive situation assumption of obligations/liabilities (including contaminated site liabilities) other, company-specific aspects.

In an initial analysis, accompanied by on-site inspections and an economic calculation that is kept quite simple, a decision is made on the question of acquisition, cooperation, or self-investment and, of course, on whether further action is worthwhile at all.

4.4.2 Case Study: Market Entry in the People’s Republic of China This approach can be illustrated very well using the example of the market entry of foreign industries in the People’s Republic of China. For example, until the end of the 1990s, it was not possible to make a foreign investment in the People’s Republic of China without a local partner. Usually, this partner was even assigned by the competent ministry. In the meantime, however, there are three different possibilities for a foreign investor, willing to settle in China, to enter the Chinese market, which—as shown below—also have a significant impact on the land situation of the future location (Glatte, 2005, S. 162):

4.5  Site Favorability

57

• acquisition of shares in or takeover of a local company • establishment of a new joint venture with a (usually local) partner • establishment of a wholly-owned foreign invested enterprise (WOFIE). The first option is the least common, especially in the industrial sector, due to the lack of adequate companies. The market is still dominated by state-owned enterprises or their successors, which are characterized by inefficient structures and outdated equipment. In addition, these companies are often also afflicted with substantial environmental problems in the production process as well as contaminated site problems in the real estate sector. The second and third options are the preferred ways of entering the market. Newcomers to the Chinese market who lack an established organization usually find it more attractive to set up a joint venture, even though, in operations, dealing with a partner often brings additional complexities. However, this also allows for immediate access to an existing organizational structure. Furthermore, the knowledge of the resident, mostly local, partner is often found to be very helpful for regulatory approval procedures. While the former alternative (share acquisition) in principle involves the acceptance of existing sites and thus the land rights available with them, the other two alternatives typically involve a process of site selection and land acquisition.

4.5 Site Favorability If a market entry is envisaged and this necessitates the evaluation of one or more sites, this must be done on the basis of suitable criteria. The professional environment of a site evaluation is extremely multi-layered and complex. It is composed of: • technical and architectural framework conditions • economic framework conditions, and • legal framework conditions. This is illustrated in Fig. 4.4. It should be noted, however, that each of the aforementioned framework conditions imposes requirements and constraints on the project. Based on this, a distinction can be made between site requirements and site conditions (Tesch, 1980, S. 360). The advantageousness of the site conditions in relation to the defined site requirements is called site favorability. Site requirements are to be understood as the settlement criteria of a company willing to settle—see constellation I according to Sect. 3.5 (Schulte & Bone-Winkel, 2002, S. 41). Site conditions represent the existing conditions at the respective alternative site.

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4  The Basics of Industrial Location Theory

Technically and architecturally shaped space

Constraint Minimum requirement Requirement Project

Projekt

Economically shaped space

Legally shaped space

Fig. 4.4   Framework conditions for a project

The comparison between the site requirements of a company and the site conditions of a locality, e.g., an industrial or commercial area, leads to the derivation and thus assessment of the respective site quality (Tesch, 1980, S. 525 ff.). The basic approach from the point of view of an industrial or commercial area is that any settlement should naturally be designed for the good of the location (state/region/ municipality). In order to meet this requirement, the interests and intentions of the location must be ascertained and weighed up. This serves the goal of being able to focus the site appropriately. Some reasons for this are: • creation of an appropriate designation according to the building code • targeted adaptation of approval procedures • targeted orientation towards potential settlers (customers) and active marketing to potential settlers, i.e., creation of a clear marketing concept • a phased development planning process to deploy resources as needed • provision of adequate infrastructure and its pricing, e.g. – road connection – power supply – water supply – wastewater disposal – telecommunications – railway/shipping connections – logistic handling and storage facilities – availability of natural gas/industrial gases.

4.6  Types of Location Factors

59

In principle, it is important for an industrial/commercial area to know the above-mentioned settlement criteria of the focused target group and to align itself with them. This means that to be successful a location seeking projects and capital—see constellation II in Sect. 3.5—must be guided by the settlement criteria of a company.

4.6 Types of Location Factors 4.6.1 Basics In many segments of the real estate market, the quality of locations and the significance of influencing factors can be argued from very different perspectives. This can go to the extreme of locations being created by project developments (Schulte & Bone-Winkel, 2002, S. 176). However, this does not apply to industrial sites. This market segment is characterized by very clear entrepreneurial requirements that must be met. A distinction is made here between the criteria determined by the core operating business and those required by functional support processes (see also Sect. 4.6.4).

4.6.2 Objective and Subjective Location Factors In the specific selection of a site, a distinction can be made between subjective and objective factors. Subjective Location Factors Subjective factors from the company’s point of view could be, for example, the existence of an already developed location or the existence of a partner (joint venture, customer, supplier, etc.) with whom the company has had some positive experience. However, experience shows that “first impressions” or personal contacts and preferences can often also play an important role. Objective Location Factors Objective factors are essentially operational aspects such as the existence of a market, availability of raw materials, land, infrastructure, energy, or personnel. In addition, there are functional framework conditions such as legal, planning, tax, customs, and financial conditions. For the purposes of this book, these objective location factors are of particular interest and will be discussed in detail below. The subjective impressions and assumptions must not be confused with the so-called soft location factors presented in Sect. 4.6.6. It is precisely the task of a professional location analysis to analyze and quantify such soft (i.e., intangible) criteria, i.e., to ultimately make them measurable and objectively comparable.

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4  The Basics of Industrial Location Theory

4.6.3 Once-Off and Continuously Acting Location Factors Once-Off Location Factors It should also be noted that there are location factors that only have a one-time effect on the location’s favorability. This uniqueness relates primarily to the time of analysis or the planned time of investment. Thus, for these criteria, the reference date is of the essence. Examples of once-off location factors include a wide variety of characteristics of the potential land for the production site: • • • •

property size land price development costs demolition costs for any structures still in place.

Continuously Acting Location Factors There are also location factors that are relevant for the location assessment beyond the reference date. In contrast to criteria with a once-off effect, for which there is no need to forecast their future effect, a statement must be made about the effect of continuously acting location factors in future periods. Information for once-off location factors is comparatively easy to obtain and is rarely subject to the risk of uncertain expectations. This is not the case for location factors that have a continuous effect. For these criteria, predictions must be made about their development and course in the future—usually over the observation period of the projectspecific business plan (e.g., ten years). The special problems of longer-term economic forecasts, e.g., due to market cycles, changed competitive conditions, exchange rate fluctuations, changed tax rates, etc., were addressed in previous sections.

4.6.4 The Operational and Functional Location Factors The distinction between operational and functional location factors is essentially based on an internal company view and is therefore applied in particular to the categorization of location requirements. This differentiates between business- or production-specific criteria, which are essential for purely operational business, and criteria that are not based on such (operational) requirements. The latter are referred to as functional location factors. Operational Location Factors a) Market environment The market as a location factor is very complex and of course also strongly dependent on the respective industry sector. Therefore, this point will only be briefly touched upon here. Of course, the existence of a market for the products in question is in itself a fundamental prerequisite for an investment decision. The existence of this market

4.6  Types of Location Factors

61

and its future development must be examined in great detail before an investment decision is made. Such an analysis should include, among other things, the possible demand, the position in the market before and after the investment, the role of competitors, and a statement about the market development and its sustainability. Attention should also be paid to possible governmental prohibitions or requirements for certain industries or investments (example: planned economy in the People’s Republic of China). b) Availability of raw materials The availability of raw materials at competitive prices is a major factor from the point of view of the industrial company wishing to locate in any given location. This is particularly true in view of increasingly globally oriented markets. However, important basic raw materials are often subject to state monopolies (e.g., oil and natural gas in the chemical industry). These often lead to distorted price levels. Only the availability of raw materials at world market prices can ensure the development of a competitive location. c) Logistical connection The fastest and most cost-effective logistical connection possible is an essential location criterion. However, depending on the type of industrial production, very different factors play a role here (availability and capacity of the respective means of transport as well as the transportability of the raw materials or products concerned) and must be weighted accordingly. Not to be forgotten here, however, is the handling of materials and products as a cost and time factor. d) Land Another essential factor for a location decision and the high associated investment, which can only be amortized over many years, is the availability of land at acceptable conditions. This is needed as production land, storage, or in the form of office space. e) Infrastructural connectivity Since energy and infrastructure facilities are very costly and only partially accessible to private, especially foreign, investors anyway due to existing investment regulations (e.g., licensing requirements for operating a power plant or similar), another decisive factor is the availability of infrastructure and energy at the potential location. f) Availability of personnel Not to be forgotten as a location criterion is the availability of qualified personnel and the acceptability of the location conditions for such employees. The latter often poses problems for industrial companies, in particular, as—either because of the proximity of raw materials or for environmental reasons—there is an interest in relocating production away from conurbations to areas that are naturally less attractive for personnel and sometimes downright inhospitable. Functional Location Factors After these operational location conditions, other location factors are also relevant, which are summarized under the term functional location conditions. These are the legal, planning, tax, customs, and financial conditions.

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4  The Basics of Industrial Location Theory

Favorable conditions of the kind mentioned above will not of themselves result in a positive location decision if the operational conditions already mentioned are not sufficiently fulfilled. However, these factors, which will be discussed below, may well be decisive in choosing between two similarly suitable sites. a) Legal framework In general, at least basic legal structures should be in place in the investment country. This should include at least compliance with the most elementary legal principles, a sufficient degree of legal certainty, and the basic practicability of the existing structures. Furthermore, the recognition of international agreements by the investment country is of great importance for the investment decision. This applies in particular to the protection of patents and trademarks, international agreements on jurisdiction, arbitration and enforcement, and investment protection agreements. In addition to the validity of general legal principles and international agreements, national law is also in focus. An investment decision is facilitated immensely if clear legal regulations apply to the project. Of particular importance here are, of course, the areas of corporate and commercial law, bankruptcy law, and procedural and enforcement law, which should provide the most effective legal protection possible. It should be noted here that in Asia, in particular, commercial law and corporate law are generally well developed. In many cases, there are Anglo-Saxon (especially English or Australian) influences that are familiar to a Western investor. In contrast, enforcement law and bankruptcy law are rather rudimentary. An investment decision is certainly supported by the existence of competent and unbureaucratic approval authorities with practicable approval procedures, courage to find new, flexible, and appropriate solutions, and reliable advance information and commitments. b) Investment regulations One aspect of the legal framework that is particularly important for an investment decision is the investment regulations (LaGro Jr., 2008, S. 65). Investment regulations are primarily aimed at attracting investment for the benefit of the particular location (for example, country, region, municipality) (McPherson, 1995, S. 130). Usually, attractive framework conditions are created to direct investments to economically disadvantaged municipalities or regions, or to regions of special economic interest. The means available to achieve this are very diverse. They range from adapted approval procedures and material incentives to special economic zones (e.g., in the People’s Republic of China). c) Fiscal framework Another important aspect for assessing the profitability of an investment decision is taxation and, in particular, tax incentives for investment (Hines, 1990, S. 135 ff.). In this context, the different types of taxes must be considered, which are shown in Figure 4.5 (Alda & Hirschner, 2009, S. 107).

63

4.6  Types of Location Factors

TAX TYPES

Direct taxes

Taxes on profits

• Corporation tax • Income tax • Trade tax on income

Tax on nonincome values

• Property tax • Land tax • Trade tax • Tax on business capital • Inheritance tax

Indirect taxes

Property transfer taxes

• Sales tax • Land transfer tax ...

Excise duties • Mineral oil tax • Motor vehicle tax • Tobacco duty ...

Fig. 4.5   Classification of tax types using the example of Germany

In addition, a distinction must be made between the different types of taxes at the higher level (state, federal state/province) and the local level (county/district, municipality). In this context, the following must be taken into consideration: • the tax rates relevant to the investment in general • the applicability of double taxation agreements, and • the existence of tax consolidation opportunities between group companies or tax benefits. d) Customs regulatory framework An additional consideration is the customs situation in the potential investment country. Generally, customs duties are fixed in terms of value and are usually non-negotiable. Exceptions to this are sometimes designated special economic zones (Abele, Kluge, & Näher, 2006, S. 80 ff.). It is certainly conducive to a location decision if • there are no import duties, e.g., for plant components or raw materials, and • the sale of products is not affected by export taxes or duties. In principle, with clever coordination within the production network of an internationally operating company (see Section 3.6.4), the burden of import and export duties can be optimized, thus reducing the economic burden. e) Financial framework Finally, we should briefly discuss the financial environment, which has come under increasing scrutiny in connection with the crises in Asia and South America.

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4  The Basics of Industrial Location Theory

It is indispensable that • adequate financing options for the project should be feasible • the transfer of foreign exchange, but also the repatriation of dividends and capital, are guaranteed • license payments or other financial transactions should be as uncomplicated as possible to implement. Problems are therefore caused by exchange control regulations, local financing requirements, or restrictions on the repatriation of dividends, capital, or royalty payments.

4.6.5 Push and Pull Factors Another approach to location-determining factors is to consider which influencing factors lead to a relocation or which framework conditions make a settlement particularly attractive. Pull Factors From the point of view of the topic of site search dealt with in this book, the pull factors are particularly relevant, i.e., the criteria which are ultimately decisive for the selection of the new location. From the company’s point of view, these are basically decisive for all forms of establishing a new location: • new company • relocation of operations • establishment of a branch office. However, this also applies, albeit with certain restrictions, to acquisitions of existing companies with existing sites in other regions as well as to the establishment of joint ventures with a partner at other sites. In the case of a company acquisition, the aforementioned restrictions result from the existing framework conditions of established sites. Here, of course, the site conditions cannot be proactively investigated and optimized. The potential buyer must accept the existing framework conditions at the time of acquisition. However, they can evaluate them as part of their due diligence prior to acquisition and assess the compatibility of the site to be acquired with the buyer’s existing site structure. In the course of this evaluation, there may be, for example, deductions in the overall economic assessment of the acquisition because a site closure or a site relocation may become necessary during the integration phase after acquisition, e.g., relocation of the activities of the acquired site to an existing site of the buyer in the same region. The location evaluation for planned joint ventures can either be equated with the situation of a new location, of an acquisition, or it is considered a mixed constellation with aspects of both situations.

4.6  Types of Location Factors

65

An opinion of the EESC (European Economic and Social Committee, Publications Unit, rue Belliard, 99, 1040 Brussels, Belgium, http://www.eesc.europa.eu) on the Extent and Effects of Company Relocations from 2006 refers to a variety of reasons for relocations, which are described in detail in Table 4.1 (European Economic and Social Committee, June 2006, S. 62). Push Factors One of the most important push factors, i.e., triggers for relocation, is the lack of expansion space (Kaiser, 1979, S. 34). This specific real estate circumstance of a lack of land reserves capable of being developed is one of the clearest triggers for a site search, since in this case there are no alternatives at the existing site. In principle, however, it is also possible for the same influencing variables to act equally as push and pull factors.

4.6.6 The Quantitative and Qualitative Location Factors Location factors can also be classified as quantitative or qualitative criteria. Colloquially, these are often also distinguished as so-called hard and soft location criteria.

Table 4.1  Reasons for relocations Reason

Percentage of respondents who selected this answer

Cost containment

59%

Striving for best practices

56%

Improvement of service quality

41%

Concentration on core competencies

39%

Improving capacity for the development of new 35% products and services Access to new technologies and skills

34%

Reduction in the number of employees

34%

Reduction of capital costs

32%

Development of in-house know-how

30%

Reduction of transaction costs

27%

Reduction in advertising expenditure

23%

Investments in technology

18%

Improving the position in the value chain

17%

Improving the ability to change

17%

Note:

Multiple answers were possible

4  The Basics of Industrial Location Theory

66

Quantitative Location Factors According to Hansmann, hard location factors are those criteria whose “…contribution to corporate success can be measured directly” (Hansmann K. W., 1994, S. 91) and which are thus also easy to compare. This includes, for example, all criteria that can be evaluated in monetary terms. These can be, for example, the wage levels at different locations (personnel costs) or the distance to raw material sources (logistics costs). Qualitative Location Factors Qualitative or soft location factors, on the other hand, are criteria that are very difficult to quantify. These are often socio-economic, psychological, or political aspects. Some examples of soft criteria and their classification with regard to their quantifiability and relevance for operations are shown in Fig. 4.6 (Grabow, Henckel, & HollbachGrömig, 1995, S. 65). Such criteria are usually easy to describe in a qualitative way. However, this is not sufficient for a measurable and thus, ultimately, objective comparison. In order to establish such measurability, methodical aids are necessary. However, it can also be a matter of the living conditions that a location has to offer or that are to be found in its environment.

Hard to quantify, Subjective assessments decide Image as a location for business

Business friendliness of authorities

Mentallity of population / work ethics Social climate

Quantifiability

Soft factors Flexibility and speed of public administration

Urban landscape / attractiveness of downtown

Availability of qualified staff Transport connections

Availability of land

Occupational training facilities Regional sales market Proximity to suppliers

Immediate relevance

Residential value

Hard factors

Taxes Levies Subsidies

Easy to quantify, facts are very relevant

Leisure value

Schools Research facilities, opportunities for scientific cooperation

Relevance for operational / company activities

Fig. 4.6   Continuum of hard and soft location factors

Cultural offerings

No direct, only indirect relevance

4.6  Types of Location Factors

67

It is not always possible to make a precise distinction between hard and soft location factors. What is important here is the respective approach. An example of this is the assessment of the burden of local taxes and duties. This can be very different between, on the one hand, the quantitatively concrete, factual burden for a company and, on the other hand, the company’s perceived, general assessment of the business climate at the evaluated location. However, the soft location factors, in particular, are becoming increasingly important for companies compared to the hard facts. This can manifest itself in a wide variety of ways: it can be reflected in the form of increased demands regarding environmental quality, a location image that is as high as possible, or proximity to research facilities. But when it comes to industrial settlement, it can also be reflected in aspects such as crime or poverty rates. Grabow et al. also found in two company surveys that the relevance of soft factors changes over the course of a decision-making process (Grabow, Henckel, & HollbachGrömig, 1995, S. 147). This analysis is understandable. Even if in an early phase of a project, especially in a site analysis (for a basic definition, see Sect. 7.4.2), there is a high risk of mixing subjective and soft factors (e.g., prejudices, see Sect. 4.6.2), this phase is still fundamentally characterized by a comparatively low level of information. With the increase in “hard facts”, as shown in Fig. 4.7, such soft factors become somewhat qualit0 = Start of location analysis tE = End of location analysis x = Remaining relevance of soft location factors

(B) Relevance of soft location factors

(A) Gathering of information

High

Low

(A)

(B) x t0 Definition of basics

Location analysis process

Fig. 4.7   Interaction of soft location factors and degree of information

Decisionmaking

tE

t

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4  The Basics of Industrial Location Theory

fied as the project progresses (Grabow, Henckel, & Hollbach-Grömig, 1995, S. 148). In addition, it is precisely the hard location factors, e.g., the topography of the site or the degree of infrastructural development of a site, that can still be significantly influenced by an individual investor, while such influence is hardly possible with soft factors.

4.6.7 Quantity-Related and Value-Related Location Factors Location factors can likewise be classified as quantity-related or value-related location factors (Schmidt, 1967, S. 91 ff.). Quantity-Related Location Factors Quantity-related location factors refer, for example, to the availability of production factors such as raw materials, means of transport, or even the sales of planned production quantities. What is important for this consideration, however, is not the costs of supply or the revenues that are achieved by the production. It is only considered whether, for example, the desired input quantities are available and whether the output quantities can be absorbed by the market under consideration. Consequently, quantity-related location factors can only be assessed as fulfilled or not fulfilled. Value-Based Location Factors Value-based location factors relate directly to the location costs, the revenues from the activities carried out at the location, or the equity required for the location. They thus influence the profitability of the location, where profitability is generally understood to mean the ability to cover the expenses (costs) arising from a business process with corresponding revenues (income).

4.6.8 Macro-Location Factors and Micro-Location Factors The location analysis examines the possible location variants. As early as 1949 McLaughlin and Robock distinguished between location factors of an area selection and a site selection in a study for this purpose (McLaughlin & Robock, 1949). This was expanded on by Townroe 20 years later (Townroe, 1969). Today, instead, a distinction is usually made between a so-called macro-location and a micro-location. Macro-Location Factors A macro-location is understood to be the larger area in which the target property or the land in question is located, as well as its catchment and interdependency area (Mayrzedt, Geiger, Klett, & Beyerle, 2007, S. 19). The macro-location can therefore be defined very differently. Its definition depends on the type and scope of the project as well as the per-

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69

spective taken on this basis. It can range from streets and districts to economic areas and even continents. Typical macro-location factors include: • the centrality of the location • its image in relation to its environment • the region’s current economic strength and its future potential • its supply and demand structure • its catchment areas • its climatic situation • the influences of natural events (storms, earthquake hazards, floods, and flooding hazards) • soft location factors such as cultural, leisure, educational, and housing offerings (abroad, also special offerings for so-called expatriates, i.e., foreign workers and their families). However, properties of the environment must also be considered macro-location factors, e.g. • • • •

superregional, regional, and local political framework laws, rules and standards subsidy and incentive opportunities, and competing projects.

The survey of macro-location factors should be considered necessary only if they have a significant impact on the success of the anticipated project or if the project itself could have an impact on such macro factors. Micro-Location Factors A micro-location is understood to be the target object or property in question itself as well as its immediate, direct surroundings (Mayrzedt, Geiger, Klett, & Beyerle, 2007, S. 486). Typical micro-location factors are, for example, in relation to the target object and its immediate environment: • the ownership situation and possible restrictions or encumbrances • existing building rights and restrictions • accessibility • access and transport links • size and layout of the plot • location • topography • immediate surroundings • infrastructure facilities • land consolidation opportunities.

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A survey as careful and precise as possible of micro-location factors is considered essential for project success. On closer examination, the same location factors can have a different significance at the micro level than at the macro level. This is illustrated by means of the following overview in Table 4.2 showing different qualitative location factors (Diller, 1991, S. 48). Furthermore, between the macro-location defining the city or the region and the micro-location defining the affected property and its immediate neighborhood, there are often intermediate spaces that cannot be exactly delimited statistically to be considered. These are referred to as the meso-level (Mayrzedt, Geiger, Klett, & Beyerle, 2007, S. 19).

4.6.9 Case Study: Chemical Company BASF SE The aspects explained in this section will be illustrated using BASF SE as an example. BASF SE is a globally positioned industrial company with 411 production sites worldwide (see Table 4.3 and Fig. 4.8). Table 4.2  Relevance of selected soft location factors Location factor

Macro location selection (interregional)

Educational institutions

Universities and colleges, techni- Schools of general education cal schools, vocational schools

Cultural offerings

Theaters, museums (“high culture”)

Neighborhood culture, cinema

Leisure activities

Climate, landscape, mountains, lakes

Sports facilities, parks

Politics/economic climate

National policies

Local policies

Image

Image of the region

“Good address”, representative building

Personal preferences

Relatives, friends, club

Neighbors, own house

Other factors

Mentality of the locals

Atmosphere, milieu

Micro site selection (intraregional)

Table 4.3  BASF SE sites worldwide (as of December 31, 2016) Number of locations

Location type

411

Production

71

Raw material extraction (opencast mining/pits)

354

Office and administration

101

Logistics/warehouse

174

Others

1,111

Total locations

4.6  Types of Location Factors

71

North America

Europe

ANTWERP

FREEPORT

LUDWIGSHAFEN NANJING

GEISMAR

KUANTAN

Regional headquarters Compound site

SÃO PAULO

P Important production site

South America

Africa, Middle East

Asia-Pacific

Fig. 4.8   Schematic overview of BASF’s major production sites

As a globally leading chemical company, it is also characterized by its so-called “compound structure” of production sites and a very heterogeneous real estate portfolio (see Table 4.3). BASF understands the term “compound” to mean the greatest possible networking and thus optimum utilization of chemical processes, value chains, and synergies (Heuser, 2004). BASF possesses substantial technologies and know-how, in particular in the form of experts, processes, patents, or catalysts, i.e., substances that enable a certain chemical reaction to occur in the first place. It can provide technical as well as engineering services. In addition, BASF has market expertise, a worldwide customer base, a global distribution network, and so-called own requirements, i.e., own needs for a product for the purpose of further processing and thus a certain basic capacity utilization for a new plant to be built. In addition, BASF has its own brands, trademarks, and trade names. For BASF, the main plant in Ludwigshafen, Germany, is not only the most important site worldwide. BASF practices its compound concept there in a particularly pronounced form, with as few production sites as possible at which as many manufacturing steps as possible are bundled in integrated production. It is also a site that operates very successfully from an economic point of view precisely because of its compound structure. This concept

4  The Basics of Industrial Location Theory

72

Basis of comparison

Ludwigshafen compound site

Distribution of production among  70 sites  100 km distance

The concentration in  a single site  with integrated production ...

... saves approx. 500MM € per year 300

70 x 150 100 km

50 Logistics

Energy

Infrastructure

Fig. 4.9   Economic advantages of the BASF compound site in Ludwigshafen

has significant advantages in terms of logistics and infrastructure costs as well as energy balances. These are briefly summarized in an overview in Fig. 4.9 (Tillmann, 2005). The interplay of more than 200 production plants, the associated infrastructure and service facilities, research facilities, and corporate steering functions make the Ludwigshafen site, with an area of approximately 10 km2, a unique site in the world. As of 2017, BASF employed approximately 39,000 employees at the Ludwigshafen site (BASF SE, 2017). It should be noted that these production plants require extraordinary amounts of electricity, steam, and cooling water at the site, among other things. For example, the annual electricity demand of 6.2 billion kilowatt hours is in the order of magnitude of the demand of a city with 1.5 million inhabitants (Heuser, 2004). However, this is often juxtaposed to substantially higher internal complexity due to administration, billing, and organizational structures. BASF’s real estate assets (land and buildings), which are reflected in the sites listed in Table 4.3, covering a total owned or leased area of 469 km2, amounted to EUR 5.3 billion as of Dec. 31, 2016, with assets in property, plant and equipment of EUR 25.2 billion and total assets of EUR 70.8 billion (BASF SE, 2016). The Group’s real estate assets thus represented 21.3% of property, plant, and equipment, and 7.5% of total Group assets. This shows that real estate assets, and in particular the way they are managed, are an important component of entrepreneurial activity for an industrial company—as exem-

4.6  Types of Location Factors

73

plified here with BASF SE. Furthermore, in the context of a location analysis, a large number of factors must be taken into account that go beyond the consideration of an individual production plant and its associated real estate. This must be taken into account in an appropriate way when selecting the analysis methods and the location criteria.

5

The Location Criteria for Corporate Real Estate

5.1 Basics In principle, there are a wide variety of perspectives for variables influencing the production location decision. In Sects. 4.6.1 to 4.6.8 seven different perspectives were discussed. Every conceivable influencing variable can theoretically be represented within these perspectives, i.e., within a seven-dimensional solution space. However, such an approach is not very practical. Therefore, it must be questioned whether individual perspectives could not be adequately considered elsewhere, or even disregarded. In Sect. 4.6.2 we showed that subjective reasons should not play a decisive role in the search for a site. The fundamental goal of a professional location analysis is to make a technically sound decision based on an objective assessment of the framework conditions. Therefore, subjective aspects are generally ignored for our further discussion of the location factors. Pull and push factors play an essential role, especially in the initial phase in the context of the conceptual orientation of the project and fade into the background compared to other factors as the project becomes more detailed. Moreover, due to their mostly fundamental character, these can essentially be mapped via macro-location factors and via isolated micro-location factors. From the point of view of an investing industrial enterprise, the criteria important for a settlement can be differentiated into operational and functional location conditions. The operational criteria are the market, raw materials, logistical connections, land, infrastructure, energy, and personnel. The functional criteria are general legal, tax, and customs conditions, investment regulations, and financial conditions. However, this view is purely company-specific. The factors in question can, however, easily be represented in other perspectives, e.g., in macro-/micro-location factors.

© Springer Fachmedien Wiesbaden GmbH, ein Teil von Springer Nature 2024 T. Glatte, Location Strategies, https://doi.org/10.1007/978-3-658-42417-6_5

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5  The Location Criteria for Corporate Real Estate

At the same time, however, there is precisely this classic division of location factors in the construction and real estate industry into macro- and micro-location factors as well as into quantitative (hard) and qualitative (soft) location factors. In addition, there are once-off and regularly recurring effects. Yet these three quite different classifications do not contradict each other. They should be seen as complementary to each other (see Fig. 5.1).

5.2 Obtaining Information Relevant to the Analysis 5.2.1 Framework Conditions for Obtaining Information Information gathering is of paramount importance in the overall site analysis process (Stafford, 1980, p. 254). This is particularly important in the screening phase, i.e., the

Criteria: (K1) = Price of property (K2) = Waste disposal (K3) = Legal certainty

Quantitative

(y)

(K2)

(K1)

(K3)

Qualitative

(z)

Once-off

Continuous

(x)

Dimensions: (x) = Frequency of occurrence (y) = Quantifiability (z) = Size of the space under consideration

Fig. 5.1   Three-dimensional classification of location factors (three examples)

5.2 Obtaining Information Relevant to the Analysis

77

generation of potential alternative sites, as well as in the site inspection phase and the final assessment of the alternatives. The timing of a project also plays an important role, because the assumptions and assessments made in the project development process are time dependent. However, the intensive and careful preparation and realization of an investment also takes time. Thus, factually sound site evaluations and site decisions inevitably lead to time delays, so-called timelags (Schulte & Bone-Winkel, 2002, p. 79). While the goal of the team entrusted with the evaluation must be to solve the task at hand with the necessary care and precision, the evaluation process should not be given too much time so that the evaluated information has not become obsolete by the time the decision is made and especially by the time the project is completed. Effort and benefit must be proportional to each other. Thus, site evaluation requires a well-structured and methodical approach, i.e., professional information management. This is an essential tool for minimizing risk, especially when investing abroad. It applies to all sub-phases of the location analysis process and refers to the completeness, conclusiveness, and comprehensibility of all information as well as its origin (Stafford, 1980, S. 254). However, in addition to the time required, there is another important factor influencing the acquisition of information. Although in the age of the internet, much information is now freely accessible, with this source of information, as with all other information, the origin and reliability of the statements made should be thoroughly checked (Russ, 2009, p. 48). This source is usually only sufficient to get a first overview. Further information requires much more thorough research, which is usually not available free of charge. This means that the cost aspect is a second factor limiting the procurement of information. These costs can be, for example, expenses for relevant literature, expert opinions, travel costs, consultants’ or intermediaries’ fees. Last but not least, the project team’s own working time must also be taken into account. It goes without saying that there is no unlimited budget available for this. It is therefore important to summarize that • the time and • costs required are limiting factors for the procurement of information. In order not to lose sight of both factors in the context of professional project management, budgeting for both aspects in the sense of a defined time and cost frame for the site evaluation is worthwhile (Goette, 1994, S. 316).

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5  The Location Criteria for Corporate Real Estate

5.2.2 Sources of Information In the sub-phase of regional screening, it is particularly important that not only enough site alternatives be available but also the right site alternatives, i.e., options with the highest possible degree of qualitative and quantitative match between the location conditions and the location requirements defined for the project. There can be many different sources for this. This is a selection of information sources frequently used in practice: • publications from the research databases of a wide range of real estate consulting companies such as − CBRE (see http://www.cbre.com/research-and-reports) − JLL (see http://www.jll.com/research) − Cushman & Wakefield (see http://www.cushmanwakefield.com/en/research-andinsight) − Colliers (see http://www.colliers.com/en-us/insights) − Savills (see http://www.savills.com/research) − Knight Frank (see http://www.knightfrank.com/research) − GVA Grimley, UK (see http://www.gva.co.uk/research) − GVA Worldwide (see http://www.gvaworldwide.com/research) • publications by settlement or business development institutions in the defined target regions, e.g., websites, trade fair presences, publications, road shows • publications by authorities in the defined target regions, e.g., ministries, provincial and local governments • enquiries, discussions, or interviews with know-how carriers • interest groups and institutions of the German economy, e.g. − German Eastern Business Association (see http://www.ost-ausschuss.de) − Asia–Pacific Committee of German Business (see http://www.ost-ausschuss.de) − foreign chambers of commerce (http://www.ahk.de) • publications about other companies that have already settled in a given target location (a good source for international settlements is the US trade journal Site Selection—on the internet at http://www.siteselection.com) • own customer and supplier databases. With the help of the above-mentioned sources, a lot of information about the country, the region, and the wider and closer surroundings of the respective alternative sites can be gathered. However, this is essentially information from the macro-location perspective. Details and aspects of the property and its immediate surroundings itself, i.e., the microlocation factors, can rarely be obtained from these sources. For this, other approaches need to be taken. The locally responsible authorities, various local institutions and pub-

5.2 Obtaining Information Relevant to the Analysis

79

lications as well as locally competent contact persons are usually good starting points. Examples of these are: • local authorities such as the building authority, town planning office, surveyor’s office, real estate office, environmental office and, in economies not organized by free market principles, the economic planning office • representatives of other public interests or persons with public influence (in regions with a strong religious character, this could also include religious representatives, for example) • economic development agencies and private project developers (the trade journal Site Selection, for example, publishes an extensive list—the so-called Guide to Economic Developers for the U.S.—on the internet at http://siteselection.com/directories) • local chambers of commerce • industrial companies already located at the location • locally established brokers, intermediaries, consultants • local press and other locally distributed publications • publications about settlements by other companies that have already taken place in the area • own data collections, if available. Regardless of the multitude of available sources and the demonstrably substantial increase in transparency and availability of information through the internet, it is nevertheless practically never possible to obtain a complete overview of all possible locations. This will be illustrated by a practical example from the PR of China.

5.2.3 Case Study: Industrial Parks in the People’s Republic of China At its second summit in Tianjin in March 2008, the China Industrial Real Estate Club (CIEREC, see http://www.cireclub.com) put the number of registered industrial and business parks in the People’s Republic of China at six to seven thousand. According to an evaluation by the real estate consultancy DTZ, there were 103 such industrial parks in Shanghai alone in 2005 (DTZ, 2005). By way of comparison: in a very conservative analysis, the real estate consultancy firm Jones Lang LaSalle had determined a total of 4500 industrial parks of very diverse types and quality for the year 2004 (JLL, 2004). These apparently quite inaccurate figures, which are also based on research by CIREC members, are, however, relatively accurate from a practical point of view. Research by the China Economic Review performed at the same time showed that only 550 Chinese industrial parks were marketed in such a way that they could be found using the usual information gathering tools (see list above) (Seth Jacobs, 2008). This means that in a nationwide site search in China using conventional methods, less than 8% of the location alternatives would be available. Based on our own research in the years 2004 to 2006,

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5  The Location Criteria for Corporate Real Estate

only 21 of these industrial parks were suitable for international investors in the chemical industry because of their location profile (land-use planning designation and marketing concept) and the professionalism of the industrial park administration. An overview of this is given in Fig. 5.2 (Glatte, 2004, p. 474). The practical test, however, puts this very extreme situation into perspective. One example is the province of Zhejian, which borders on Shanghai. Of the 800 industrial zones officially designated there in 2004, only 200 could be described as operational, i.e., ready to accept new settlements (Glatte, 2004, p. 475). Therefore, in 2004, the central government ordered a six-month, nationwide moratorium on zoning and a review of all existing industrial zones. In this context, about 70% of all industrial zones had their permission withdrawn or severely restricted (Schneider & McMahon, 2006, S. 36). Nevertheless, this example shows very clearly that, especially in developing and emerging countries, the dynamics of economic development can sometimes be very great and thus the validity of available information may only be short-lived. Furthermore, it also makes it clear that in addition to all the prepared and readable information, a great deal of individual, local know-how is still necessary to identify the

Fig. 5.2   Overview of chemical parks in the PRC (2008)

5.4 The Macro-Location Factors

81

right location alternatives. Many years of continuous observation of the industrial real estate market as well as the settlement behavior of other companies in the target regions under consideration proves to be a fundamental prerequisite for the successful identification of alternative locations.

5.3 Key Manufacturing Location Factors In Sect. 5.1, the different perspectives of the location-determining factors were reduced to three relevant dimensions. Furthermore, the perspective of the uniqueness or continuity of the effect of location factors can be clearly shown and compared with monetary quantifiability via the discounting of values (costs). In this way, the decisive location factors can be presented in a very practicable way in a checklist, differentiated according to their macro- and micro-location level. The quality feature of quantifiability (hard/soft criterion) can be presented in parallel. Micro- and macro-location factors can be delineated as follows, as already outlined in some detail in Sect. 4.6.8. The micro-location considers only the plot or object relevant to the project and the directly adjacent neighborhood (Schach & Sperling, 2001, S. 10). The macro-location factors encompass practically all other spatial criteria (Mayrzedt, Geiger, Klett, & Beyerle, 2007, p. 19). Their dimensions can vary widely. The macrolocation may only encompass the respective neighborhood or municipality. But it can also affect the entire world when a new industrial zone covering several square kilometers is built, since the economic framework data could be affected on a global scale, for example, by the shift in the global flow of goods and the global production portfolio of a particular industry.

5.4 The Macro-Location Factors 5.4.1 Market Centrality Basically, there are two main markets to consider when establishing a production site: • the market for the raw materials of manufacturing (input) • the market for the products of manufacturing (output). Often the geographical location of the raw material market is not the same as the location of the market for the final products of the manufacturing plant (Zaddach, 2007, p. 25). It is therefore important to position the site as spatially optimally as possible so that it has an economically sustainable location in the long term. At the same time, it should have reasonably short transport times (Fig. 5.3). In this context, there are three options for a company:

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5  The Location Criteria for Corporate Real Estate

Output

Sales market

Input

COMPANY

Procurement market

Fig. 5.3   Relevance of markets for the production location

Impact

Impact

1. a production site in the procurement market 2. a production site in the sales market 3. a production site in a different environment (neither procurement nor sales market). The appropriate decision, which is made within the framework of strategic guidelines and a production process analysis, is based on an examination of the company’s own general production conditions, but also of the essential framework conditions of suppliers and customers. Basically, the availability and capacity of transport systems as well as the transportability of the respective raw materials or products will have to be examined (Rodrigue, Comtois, & Slack, 2009, p. 93). The following criteria in particular must be taken into account: • • • • •

basic nature of the product product handling (piece goods, bulk goods, liquid) production capacity (quantity, volume, tonnage) hazard potential of the product (toxicity, flammability, explosiveness, etc.) forms of delivery, production, and acceptance (continuous, in batches, seasonal, just in time, etc.) • form of shipment (bulk transporter, container, tank, IBC, big bag, commercial filling, commercial packaging, etc.) • means of transport for collection and delivery (truck, railway, pipeline, inland waterway vessel, ocean-going vessel, aircraft). Notes: • IBC: The intermediate bulk container (IBC) is a common form of shipping in the chemical, pharmaceutical, cosmetics, and food industries. It has a capacity of 500 to 3000 L and is used to transport mostly liquids, but also granulated bulk goods. Nowa-

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83

days, IBCs are usually made of plastic or stainless steel. They are available in standard and heated versions. • Big bag: Packaging form of bulk shipping. Case Study: Petroleum Processing Industry in China The oil and gas processing industry in China faces the problem that a large part of the population and thus also the main sales markets and qualified personnel are to be found in the provinces along the eastern seaboard. At the same time, in a country that is already poor in raw material resources, the raw materials needed for this industry are mostly found only in the interior and in the western provinces. To close this gap, a nationwide pipeline system is being built, the centerpiece of which is the approx. 4000 km-long West–East Pipeline from Xinjiang Province to Shanghai (Fig. 5.4). However, this engineering masterpiece—realized within only a few years—has its price. The sales price for natural gas increases with practically every kilometer of pipeline. Companies in the petrochemical industry are therefore faced with the decision of either locating close to their customers in the eastern provinces, drawing from a large pool of qualified employees there, and paying the significantly higher gas prices, or establishing themselves in the western provinces near the exploration sites and profiting from the substantially lower gas prices there.

Fig. 5.4   PR China—route of the West–East-Pipeline

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However, the end products must then be transported from there to the customers, i.e., to the eastern provinces. Moreover, the western provinces are considered unattractive for well-qualified personnel, due to their level of development. These aspects were already considered in the market potential analysis published by Harris as early as 1954 (Harris C. D., 1954, p. 321 ff.). It examines the attractiveness of a market at the location (Si) in relation to production at the location (Sp). This is based on the aggregated transport cost model, which shows the relationship between the turnover of a product in the market in question (area under consideration (Bi)) and the transport costs for delivering the product from the production location to the market (CT,pi) as a logistics expense (CL) in relation to the production location (Sp) (Stafford, 1980, S. 51).

CL =

i ∑

Ui × CT ,pi

(5.1)

B=1

Legend: Ui = turnover/quantity of the product sold in the market (Bi) CT,pi = transport/freight costs (unit price) between locations (Si) and (Sp) CL = total logistics costs for the products Sp = production site Bi = sales location (market) i = number of sales markets considered (Bi) If freight costs are not available, the respective distance can alternatively be used as an input value in this model instead of freight costs (CT). Harris uses this data to ultimately derive the (logistical) relevance of a production location (Sp) for certain sales markets (Bi). According to this, the market potential (P) of a production location is a function of the market size (Ui), with a reciprocal correlation with the market distance (CT,pi).

Pp =

n ∑ Ui T i=1 T ,pi

(5.2)

Legend: Pp = Market potential of a production location (Sp) This consideration is also essential for determining the optimal routing for the transport management to be established at the production site. For this, knowledge of the existing transport connections should also be available (Abele, Kluge, & Näher, 2006, S. 300).

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5.4.2 Location References The references that a location can boast are a component that should not be underestimated. From the point of view of an analysis of macro-location factors, very basic framework conditions must be taken into account here, which often have little to do with hard factors, but more with soft factors (see Sect. 4.6.6), or even pure psychology. However, the impact of precisely these criteria should not be underestimated. These include factors such as: • • • • •

stage of development public image and potentials development maturity and reliability of supra-regional infrastructures typical industries in the immediate and wider vicinity of the site the existence and experience of other companies in the area under consideration for the site search.

An important role for the development status is played by the level of detail of the planning of the extended site environment (e.g., large-scale industrial clusters, economic areas, etc.) or its infrastructural basis. The planning status levels can be categorized as follows: • • • • •

vision rough planning detailed planning pre-existing infrastructures pre-existing industrial settlements.

The condition of the infrastructure itself can also be differentiated into: • • • •

planned only start of construction under construction construction finished.

This refers to the physical condition of regional facilities (e.g., power plants and other infrastructure facilities) that are important for the settlement of industry at the macro level, but not the legal buildability in the sense of public building law or the local infrastructural development. These issues are covered at the micro level, with separate criteria.

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This aspect is quite significant. For example, in every country there are regions with different levels of development. In Germany, too, there is a North–South divide and an East–West divide. Companies listed on the stock exchange are especially keen to ensure that their name is not associated with negative headlines. For example, in a region otherwise known for high environmental pollution and low life expectancy, it does little good if environmental liabilities and economic consequences for the company seeking to locate there can be explicitly ruled out. The mere fact that the name of the company could be associated with the name of the region is often a knockout criterion. The evaluation of the image and the potential primarily hinge on the perception in the higher-level public opinion, i.e., supra-regional, national, or even international media of any kind, administration, politics, and non-governmental organizations (NGOs). A comparison of past and present perceptions is useful, as is a statement about possible future trends (McCann, 2002, S. 211). This situation is particularly charged in the case of settlement projects in developing and emerging countries. It is in particular here that the current state of development and the expected medium- to long-term potential often diverge very widely. Even within such countries there are equally large differences between the prospering and lagging regions. Good examples from the recent past include India and China, but eastern Germany also fell into this category in the 1990s. These differences are also the reason why governments in these countries invest extensively in the infrastructural development of the entire country and especially in the economically less developed regions. This is designed to make it easier for investors to consider these regions and to compensate for logistical disadvantages. The image of a location environment, e.g., a region, should also not be underestimated. The mere statement that the administration of a province is not business-friendly can sometimes have fatal consequences for individual locations within such a province that are seeking to attract settlements there, as these do not even make it on to the list of regions to be considered by international investors in the pre-selection stage. Although it is one of the specific aims of this book to exclude such subjective criteria and to objectify them, such circumstances are part of a frequently experienced practice. This is why they have been addressed here. Further aspects of this are dealt with in Sect. 5.4.3. At the same time, it can be considered very advantageous if, for example, other well-known companies and possibly also direct competitors are already located in this region or are considering settling there. The development maturity and reliability of infrastructures of all kinds also make a significant contribution to the positive or negative image of an area under consideration. These can be comparatively simple factors that are taken for granted in Western industrialized nations, such as a stable electricity supply, good mobile phone coverage, or a dense highway or railway network. In this context, it is advisable to determine which industries and trades are particularly common in the areas under consideration, and which are underrepresented. It should be noted that while there are intentional cluster formations, which are partly promoted by

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settlement incentives (pull factors), a lack of industries can be indicative of an unattractive environment, but also of a market gap. This must be ascertained during the market and competition analyses. The existing experience of other companies within the chosen region should not be underestimated. This can be invaluable. The above-mentioned subjective criteria such as the image of the location can be significantly objectified with references and case studies. The view of the activities of reference companies in the area under consideration should be differentiated with regard to the type of company. These can be current, former, or even potential future • • • •

customers suppliers competitors, or service companies.

But they could also be other, third-party companies. With a view to reference settlements, however, it is also necessary to categorize whether these • • • • • • • • •

have only been announced are seriously being planned at the moment are already under construction have already been implemented and are producing are being expanded or it is planned to do so are being curtailed or pared back are being closed are being disposed of or it is planned to do so are being demolished and recycled.

5.4.3 Political and Ethical Framework Conditions Entrepreneurship in general, and thus industrial investment, is never completely free from political influences or interference (Stafford, 1980, p. 117). These range from legal framework conditions in everyday working life to taxes and customs duties to targeted influencing through settlement subsidies or even settlement prohibitions. Against this background, the respective societal framework conditions are of particular importance for an industrial settlement and thus require careful prior examination, especially with regard to: • social stability • stability of the political system and form of government

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functioning of markets and price mechanisms position vis-à-vis foreign investors transparency of political decisions vulnerability to corruption.

Depending on the size of the investment, this concerns all levels that may be affected, such as: • • • • •

local levels (municipality) higher local levels (county, district, administrative district, etc.) regional levels (province, state, etc.) national level (level of central or federal government, etc.) transnational levels (alliances of states, e.g., European Union, but also economic areas and customs unions, etc.).

In the context of foreign investments, an assessment of the societal and political risks is particularly important, as these may be in marked contrast to the framework conditions in the investor’s home country. Such risks are, for example, analyzed in detail by experts as part of regular studies and published in the form of ratings. At the national level, rankings are regularly compiled and published by various specialist media. An example of this is the Top State Business Climate Ranking conducted annually for the U.S. by the trade journal Site Selection Magazine (see http://www.siteselection.com) (Arend, 2017). At the international level, the Political Risk Indices of the BERI Institute (see http://www.beri.com), PRS Group Inc. (see http://www.prsgroup.com), and Euromoney magazine (http://www. euromoney.com) must be mentioned here (see also Sect. 6.5.3). The analyses by Transparency International (see http://www.transparency.org) also support the analysis of transparency and susceptibility to corruption. Such analyses sometimes lead to drastic results, possibly even the exclusion of countries for further consideration in the context of a location analysis by a company. For example, after the collapse of the Eastern Bloc in 1989/90, the board of Volkswagen AG decided to increase its involvement in the region. As part of a strategic target, the countries of the former Eastern Bloc were investigated. The result of these investigations was that, at the time of the study, in principle, only three countries were available for a possible investment to open up the Eastern European market: Hungary, Poland, and Czechoslovakia. All other countries were eliminated as investment targets because of simple plausibility analyses, which were essentially due to political or economic policy framework conditions (Goette, 1994, S. 316). It can be stated that in addition to favorable economic conditions such as market conditions and favorable or qualified production resources, politically stable conditions are another important aspect of a location decision. These include labor market policy, trade,

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currency, and tax policy, but also investment promotion, some aspects of which are discussed separately in the following section. Another aspect besides the political environment is the business ethics found in the business world. This concerns non-transparent business practices, insider trading as well as corruption.

5.4.4 The Legal System Another aspect, which to a large extent can even be derived directly from the political framework conditions, is the legal system of the target country under consideration for an investment. A variety of factors are important here and must therefore be taken into account in the course of a location evaluation. In principle, this applies to all relevant legal domains, but, from a real estate perspective, it is particularly true for property law, public and private building law, tax law, and company law (Mayrzedt, Geiger, Klett, & Beyerle, 2007, S. 670). There are two main thematic areas that can be distinguished in this context: • framework conditions for foreign investment and • legal certainty. The first topic—the framework conditions for foreign investment—essentially covers the possibilities of market entry in the respective country for foreign investors. This begins with the fundamental question of whether market entry is possible at all. Quite a few countries, and this situation is not limited to developing and emerging countries, allow foreign investment in principle, but only subject to numerous conditions and restrictions. In addition to the type and scope of market entry, the question of whether a foreign investor can obtain ownership of land and the facilities on it must also be determined. This aspect is dealt with separately in Sect. 5.5.7. The second major sub-area with regard to the legal system is legal certainty. This topic can be broken down into different areas: • • • •

legal regulations for property independence of the courts implementation of court rulings existence or risk of trade barriers.

Since many industrial locations are established in developing and especially in emerging countries, they are exposed to the legal framework conditions there. The emerging countries that are of particular interest for investments usually have a legal system that is still in the process of being established. Here the problem arises that the legislation

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Table 5.1  Intellectual property in China’s courts Number (Year 2006)

Average increase p. a (in %)

Period under review (years)

54,300

17.1

2002 to 2006

Judgments on intellec- 52,400 tual property infringement claims

19.3

2002 to 2006

Criminal prosecution for intellectual property infringement

41.8

2004 to 2006

Intellectual property infringement claims filed

769

lags the usually very dynamic economic development and is therefore subject to frequent changes, transitional provisions, etc. (Mayrzedt, Geiger, Klett, & Beyerle, 2007, S. 671). The legal framework for property refers to property law, i.e., the possibility of private ownership of land as well as any other fixed assets. However, it also refers to intellectual property. It is precisely in this area, for example, that foreign investment in the People’s Republic of China has been the subject of great concern for many years. There have been almost daily reports about this in the press for years. However, companies, both domestic and foreign, are now increasingly taking legal action against infringements of intellectual property rights in China, as illustrated in Table 5.1 (n.a., 2007). In this context, another problem area, the independence of courts, should be mentioned. The enforceability of rights as well as obligations in investments only make sense if independent courts rule on them. Another aspect is the independence of the jurisdiction. The remarks in Sect. 5.4.3 apply equally to jurisdiction. One possible solution to this in the case of contractual issues is the choice of jurisdiction in a legally secure country. However, this only guarantees the possibility of a fair legal dispute, not the final implementation of the judgement. Moreover, in some cultures a legal dispute can lead to a loss of trust or even to the termination of business relations (Godau, 2006, S. 138).

5.4.5 The Financial, Tax and Customs System The relevant criteria of the financial system, taxation, and customs duties were explored in Sect. 4.6.4. Therefore, we will not elaborate further on these three aspects.

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5.4.6 The Socio-Economic Framework Conditions The collection of socio-economic data essentially comprises key data that already emerge in the course of the market analysis, such as (Mayrzedt, Geiger, Klett, & Beyerle, 2007, S. 666): • population development • income structure of the population (average, unskilled and skilled workers, white-collar workers, and managers) • purchasing power (from the perspective of potential local and foreign employees) • labor market data (unemployment rate, main employers, etc.). In principle, it is questionable how useful such data is for a site search. After all, these are usually statistical evaluations aggregated at a very high level. Moreover, the quality of such data is often questioned, especially in developing and emerging countries. However, it must be recognized that this information helps to get a first indicative impression of the social framework conditions in the country concerned. But at the same time, this general data cannot replace a detailed analysis of the individual situation of the locations to be evaluated.

5.4.7 The Socio-Cultural Framework Conditions The study of socio-cultural site conditions focuses on the following aspects: • • • • • •

overall living conditions security housing conditions educational institutions cultural offers environmental conditions.

General living conditions include aspects such as basic attractiveness, internationality, type of national language, foreign language skills of the local population, cultural circle and predominant religion, hierarchy and status (e.g., role of men and women), as well as differences in non-verbal communication (Godau, 2006, p. 170). Likewise, public holidays must be taken into account. An important issue, especially in regions of Latin America, Africa, Central Asia, and Eastern Europe, are questions of general security and crime. In addition, existing housing conditions and educational facilities are relevant (Myhra, 2000, p. 29). Here, a distinction must be made between the possible demands of local employees and foreign employees and their families (expatriates).

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Likewise, an overview of general cultural opportunities such as restaurants, cinemas, theaters, cultural events of various kinds, etc. should be gained (Grabow, Henckel, & Hollbach-Grömig, 1995, p. 335). Equally, the environmental conditions at the locations to be investigated are important, especially from the employee’s point of view. This concerns the general level of cleanliness in public areas such as streets, squares, public buildings, but also the predominant (well-kept or neglected) condition of buildings. In addition, environmental pollution issues must be assessed, such as air pollution, water contamination, etc.

5.4.8 Climatic Conditions The impact of climatic conditions on industrial production can be broadly classified into three different categories (McPherson, 1995, S. 62): • the conditions that influence the production site itself • the conditions affecting the operation of the facilities after settlement • the conditions that influence the attractiveness of the location for employees. The first category includes industries for which certain weather conditions have a fundamental influence on the raw material base as well as the sales situation of their production. Regarding the raw material base, for example, productions that depend on agricultural or forestry products are worth mentioning, such as biofuel plants, paper mills, food industry, etc. Conversely, regarding the sales situation, there is an increased dependence on weather conditions for enterprises with customers in agriculture and forestry, e.g., producers of crop protection products. The second category refers to technological and business aspects of a manufacturing process. These are problem areas that are mostly technically solvable but cause additional costs. These have a correspondingly negative effect on the economic analysis of the alternative locations. For example, extremely high as well as low temperatures lead to correspondingly higher operating costs for the cooling or heating of production halls. In addition, extreme temperature conditions may also require other technologies that are less sensitive to very high or low temperatures or disproportionately high temperature fluctuations. The same consideration applies, of course, to other climatic conditions such as humidity, air pressure, but also other, increasingly topical, stresses such as ozone and smog. The employee perspective is also important here as a third category. Regions with temperatures and precipitation in extreme ranges are considered less attractive. In addition, restrictions on daylight (e.g., at locations in increasing proximity to the polar circles) lead to additional psychological stress. The following aspects can therefore be summarized as essential climatic factors (LaGro Jr., 2008, S. 117):

5.4 The Macro-Location Factors

• • • • • •

93

temperature humidity wind precipitation, e.g., as rain or snow solar radiation intensity availability of daylight.

5.4.9 Site-Critical Natural Events Except for occasional floods, as recently on the Oder and Elbe rivers, Germany has fortunately been spared major natural disasters. However, there are other risks to consider when looking for sites internationally. For example, many companies in the South Asia region were affected by the tsunami disaster in 2004. Similarly, most oil and chemical companies along the Mississippi River had to shut down production for weeks and sometimes months due to Hurricane Katrina in 2005, as production facilities and pipelines were destroyed. This was all the more concerning because a large part of the American petrochemical industry is concentrated in this region. There are also numerous regions that are regularly hit by earthquakes. The following are some examples of critical natural events influencing site selection: • • • • • • • • • •

wildfires low and high tide in coastal areas flooding droughts cyclones earthquakes rock bursts volcanic eruptions sinkholes and landslides snow pressure and avalanches.

For all natural events, there are technical possibilities for damage prevention, which, however, sometimes mean significantly higher construction and operating costs. Risk minimization through insurance against natural hazards is possible in principle, but often only to a limited extent and within narrow limits. Therefore, a detailed risk assessment and, if necessary, a cost–benefit analysis regarding the usefulness of individual technical measures is advisable.

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5.5 Micro-Location Factors 5.5.1 The Location of the Site The most important and oft-quoted principle in the real estate industry is “location, location, location”. Especially in the case of office and residential real estate, this principle implies the dependence of profitability and the potential for value appreciation on the choice of location. Although the choice of location for industrial projects is not characterized by the achievement of a return from the land or speculative aspects of the increase in value of the property itself, the location remains a very important parameter in this case as well. However, other determinants are decisive for an attractive industrial location. Some indicators for a good location for an industrial site are the lasting existence of first-class location references as well as the technical, legal, and economic framework conditions necessary for the specific industrial sector. These are now presented in detail. Furthermore, the immediate spatial classification must be considered from a spatial and location planning perspective: • • • •

central location peripheral position decentralized location spatial remoteness.

This allocation must be made in relation to a relevant or comprehensible reference value for the settlement, e.g., in relation to the location of city centers or other industrial settlements (customers, suppliers, etc.). Another essential aspect is the fundamental suitability of the location regarding its immediate surroundings, e.g.: • • • • • • • •

related industry unrelated industry logistics wholesale/retail administrative and office properties residential properties agriculture forestry.

This neighborhood could, for example, be open-minded, skeptical, neutral, or negative about an industrial settlement. This may allow for certain subsequent activities of the neighborhood upon concretization or implementation of the settlement to be expected.

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In the reverse case, the advantageousness of the immediate surroundings is also decisive from the point of view of the company wishing to locate there. Possible synergies could arise here due to the immediate vicinity of already existing own activities, associated companies, partner companies, customers, suppliers, or service companies. The proximity of competitors can also be an advantage, disadvantage, or even a knockout criterion, depending on the respective situation.

5.5.2 Site References As with the macro-location factors, the references a location can boast are an essential component for the micro-location factors. These are in part the same factors, but in much greater detail: • stage of development • public image and potentials • existence and experience of other companies in the area under consideration for the site search. The level of detail of the planning for the site itself is also important for the development status in this case. Its categorization can be found in Sect. 5.5.8. The technical development status to be examined at the macro level (i.e., supra-local facilities and facilities important for industrial settlements at the supra-regional level) is analyzed separately at the micro level in the segments of plot, infrastructure facilities, and infrastructure connections. Similarly, the assessment of the image and potentials, as with the macro level, hinges primarily on the perception in public opinion. From the perspective of the micro-location, however, the reference level is purely local. These are, for example, local media of all kinds, the local administration directly responsible for the property and its development, local politicians, and local NGOs such as residents’ interest groups. It also includes the will to facilitate and the professionalism of the local administration responsible for the property, e.g., the industrial park administration (Grabow, Henckel, & Hollbach-Grömig, 1995, p. 332). However, it is also worthwhile at the micro level to compare the state of all these aspects in the past, present, and foreseeable future. At site level, the experiences of other companies are at least as relevant as at the macro level. The remarks made in this regard in Sect. 5.4.2 therefore apply equally at the micro level. Excursus: Settlement References of Industrial Parks and Business Parks Especially for industrial parks and business parks, external marketing and highlighting their own profile and potential are crucially important. Industrial parks are areas designed as a unit and designated for industrial settlement, which, in addition to the land,

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provide several industrial investors willing to settle there with various other services, e.g., of an infrastructural and administrative nature, as part of a comprehensive concept usually geared to specific sectors. The same definition applies to the business park segment. For these institutions it is extremely important to indicate which projects are eligible for settlement and—even more importantly—which settlements are not possible. A particularly broad positioning of such areas according to the principle “we are open to everything” tends to have a detrimental effect. First-time industrial settlers, in particular, would like to have guarantees about the kind of industry or commerce that will make up the future neighborhood and which settlements may be excluded (Falk & Falk, 2006). This can be justified against the background of issues relating to land-use planning and environmental law. However, there may also be competition-specific reasons. In the interest of the industrial or business park as well as in the interest of the potential settlers, it is therefore important to indicate very clearly what the specific interests of the location (or the municipality) are and what special features distinguish the location. In principle, there are two forms of industrial and commercial parks that are similar in their implementation, but fundamentally different in their approach—and thus their project idea: • Type 1: The state-owned industrial/commercial park This is a location development initiated by state authorities. It usually takes place through specially founded state or semi-state development companies and is usually accompanied by various settlement subsidies and investment incentives. Such parks are established with the aim of deliberately attracting or guiding industrial and commercial settlement for the purpose of − job creation − raising tax revenues − relocation of industries and commerce (e.g., out of the city), and thus − enhancing the quality of life and attractiveness of the region. • Type 2: The private industrial/commercial park A privately initiated industrial or commercial park can in turn be created for three rea­ sons: a) An investor considers it attractive to develop a site himself and to market its land along with the infrastructures to be invested in. This can be done either at a greenfield site (example: Singaporean investors in the Suzhou Industrial Zone, PR China) or by taking over an operating company and marketing an existing site. b) A company as sole proprietor seeks to attract third parties to its existing site, which still offers sufficient open space, in order to − find synergies with such third parties and thus optimize its own capacity utilization (integrated concept) − better utilize surplus infrastructures and unneeded open spaces (cost optimization, raising hidden reserves).

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97

The primary aim is therefore to reduce costs and increase the profitability of the company. c) An existing industrial site of an individual enterprise becomes less important for it. No major investments in the site are planned any more. Often, entire parts of the formerly owned site have already been sold to other operators or shut down in the course of divestments. It is therefore important to actively market the site via an operating company with a view to its infrastructure and open spaces. Irrespective of whether the site is within a business or industrial park or a stand-alone plot of land that can be built on, the potential of the site should be evaluated and presented. The form in which the site and its immediate surroundings will develop in the medium to long term should be indicated. Furthermore, insights from companies already located in the neighborhood are very helpful. It is advisable to interview the management of such companies in detail about their views and experiences of the settlement process itself as well as about the production period, and to evaluate these findings in an appropriate form and apply them to one’s own (rarely similar) situation.

5.5.3 Controlled Settlement Promotion One aspect of the local framework conditions that is particularly important for an industrial investment decision is the regulations on settlement promotion. Investment regulations are primarily aimed at attracting investment for the benefit of the respective location—for example, country, region, municipality (McPherson, 1995, p. 130). The means that can be used to do this are very diverse. A distinction must be made between measures of an organizational, legal, and economic nature. The organizational framework conditions primarily include the existence of an efficient administration and clear contact persons for the investor. The model of one-stop agencies, which has been successfully practiced in various Asian countries, should be mentioned here in particular, where an investment authority is either solely responsible for the decision or at least takes over the coordination with all other authorities concerned. This model goes far beyond the competences of the offices for economic development known in Germany. Simplified or streamlined approval procedures can also be an organizational approach. This also includes the classification of investments into subsidized, permitted, restricted, and prohibited investment projects, as is practiced in the People’s Republic of China, for example. Legal framework conditions can be the locally limited legal permissibility of special company forms or even the designation of a special economic zone (Glatte, 2004, p. 473). Material framework conditions can take a wide variety of forms, e.g.:

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5  The Location Criteria for Corporate Real Estate

tax concessions, tax exemptions customs duty concessions, customs duty exemptions investment aid more favorable credit terms than available on the capital market assumption of sureties, guarantees, etc. free or subsidized provision of building land free or subsidized provision of infrastructure connections.

In the case of foreign investments, there is the additional factor that foreign investments are specifically promoted for the benefit of the host country. Accordingly, investment regulations in many cases contain provisions that define the interests of the host country more precisely, such as: • the issue of local participation in investment projects • know-how and technology transfer requirements • exclusion or increased control of foreign investment in certain areas such as the extraction of important raw materials or areas of general interest (energy, transport and traffic, banking and insurance sector). As a rule, general licensing or registration obligations apply. Such regulations naturally limit the investment options. One example is the local participation at shareholder and management level required in Malaysia due to the Malaysianization policy. As part of the IMF’s support in the face of the economic crisis in Asia, investments have been facilitated in both Indonesia and Thailand, where previously quite restrictive regulations on the business purpose accessible to foreigners applied. In Indonesia, for example, a foreign participation of 100% is now possible for new investments. In the context of the increasing opening of the Chinese market, this now also applies to the People’s Republic of China. Singapore, by contrast, has always had very liberal investment legislation, which essentially grants equal treatment with local investors and only imposes some restrictions in strategic sectors. In addition to the regulations on taxes and customs duties, which actually promote investment and are explained below, investors have a vested interest in protecting their investment, i.e., their invested capital, their return on investment, and their know-how. This is particularly understandable in the case of large-scale industrial projects in view of the usual investment sums of sometimes several 100 million euros. Furthermore, it is of course also important that the conditions for the economic success of the investment are in place. Therefore, as a rule, the possibility of exercising operational control of the investment project is also an important aspect for foreign investors when deciding on a location. Operational control in this context means the possibility to control 100% or at least a clear majority of the company shares and to exercise freedom of operational action and personnel decision-making.

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99

From the foregoing, it is clear how important the balance of investment regimes is to promote investment and thus foster national prosperity as well as transfer of technology and know-how, and secure jobs.

5.5.4 Potential Environmental Influences Environmental Problems Associated with Industrial Settlement Environmental issues have of course increased disproportionately in importance in recent decades, and not only in the search for a site. But it is precisely in site search that the importance of this topic becomes apparent. For example, Western industrial companies that want to locate in developing countries or emerging economies are often accused of wanting to escape the strict environmental regulations in their home countries by relocating. At the same time, it is precisely their lead in the use of environmentally friendly production technologies that is in demand in such countries and is therefore often very actively demanded by the local authorities. Nevertheless, it is undeniable that an industrial settlement will have an influence on its surroundings. It must be granted a so-called right to disturbance for the medium to long term (Schulte & Bone-Winkel, 2002, p. 179). For an industrial settlement, the mutual clarification of environmental influences between the project to be settled and its potential surroundings is therefore crucially important. Emissions and Immissions Industrial settlement goes hand in hand with possible emissions of various kinds: • air (exhaust gases) • noise • wastewater. For a location analysis, it is important to ascertain which emission limits apply in the host country and especially at the respective location. Especially in developing and emerging countries with sometimes less restrictive environmental legislation, it is particularly important to scrutinize the supposedly more attractive framework conditions for their sustainability and practicability. However, such countries are catching up with the industrialized nations in terms of environmental legislation in increasing numbers and with increasing speed. A location decision based on supposedly relaxed environmental conditions, e.g., in the form of higher limit values for wastewater discharge into receiving waters, could very soon turn out to be the wrong choice of location if these ills are eliminated in short order. In this respect, it is thus recommended to apply the standards of the western industrial nations, i.e., European or U.S. standards and limit values, especially in these cases.

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The three main forms of pollution for emissions—air, noise, and wastewater—are not only important from the point of view of expected emissions from the planned settlement, however (United Nations, 1992). Air and noise must also be considered as possible immissions and thus as possible restrictions for the planned settlement. Neighboring emitters can cause restrictions on a settlement’s own possible emissions. Since it is ultimately (mostly) not the emission itself but its impact that is measured and assessed, this is particularly important. Noise pollution in the form of immissions is usually measured at the plant or property boundary. The same applies as a basic rule to exhaust gases in the case of air pollution. Larger industrial estates in particular offer the opportunity to dimension plants through favorable positioning within the plant premises in such a way that the necessary noise protection facilities for the limit values ultimately to be complied with at the plant fence of the industrial estate can be designed in a less costly manner. However, this requires modelling of the overlaps of noise pollution with neighboring plants, which is costly but often very worthwhile from an economic point of view. This consideration does not take into account occupational health and safety regulations in the sense of specifications for noise levels at the workplace. These would have to be considered in the construction planning of the plant. For wastewater, the discharge values at the transfer points to the public sewage network or to the municipal wastewater treatment plant or at the outlet structure to the receiving water usually apply. Landscape and Nature Conservation By now, nature conservation issues have to be increasingly taken into account in the planning of projects due to a variety of legislative requirements. Site selection—and in particular industrial site selection—is severely restricted or even impossible as soon as the potential site is located in an area worthy of protection (see Sect. 5.5.8). In this context, environmental impact assessments (EIAs) are essential components of the siting decision (Lampert & Woodley, 1991, p. 14). Likewise, plantations, animal biotopes, or aspects relevant to landscape protection (e.g., drifting dunes) that may be worthy of protection must be considered in general planning or the design of open spaces (Wiendahl, Reichardt, & Nyhuis, 2009, S. 386). Harmful Soil Changes Another problem area in the field of industrial projects is the treatment of existing or expected harmful soil changes. This usually refers to the risk of possible contaminated sites on the prospective property. The conceptual definition of contaminated sites, former waste disposal sites, and former industrial sites is regulated in Germany in Article 2 of the Federal Soil Protection Act (see Fig. 5.5). The dimension of this issue can be seen in the fact that currently in Germany, as a traditional industrialized country, there are about 19,000 known contaminated sites with an

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5.5 Micro-Location Factors

SOIL PROTECTION AND CONTAMINATED SITES

Land consumption

Soil protection problem

Protection objectives

Harmful soil change

Sustained soil stress (material and physical)

Contaminated site

Not decomissioned company property

Former waste disposal site

Agricultural and forestry property

Former industrial site

Shoulders of traffic installations

Soil function, foresight

from civilian use

Sewage and piping system

from military use Former industrial site of military production

Accident

Former industrial site of military operations

Soil function, hazard prevention, foresight

Hazard prevention, human health, natural environment

Fig. 5.5   Soil protection terms in the context of contaminated sites

undisputed need for cleanup and another 261,000 sites identified as suspected contaminated sites (Federal Environment Agency, 2017). The latter are further subdivided into approximately 68,000 suspected former waste disposal sites and approximately 193,000 suspected former industrial sites (see Table 5.2). In 1997, the number of known contaminated sites was still at 5550 (Schmidt-Eichstedt, 1998, p. 89). Outside Germany, however, one finds oneself faced with very different understandings of this. This means that in countries with a less well-documented industrial history—especially in the case of developing and emerging countries—the development of an area for industrial use is fraught with risks in terms of harmful soil contamination due to a (possibly unknown) previous use. From a property-specific perspective, contaminated sites refer to the pollution of soil and groundwater. Especially at former industrial sites, one often encounters unpleasant surprises in the form of concealed landfills, hazardous substances injected into the soil or discharged into receiving waters or groundwater, residues from leaks, etc. It is important to carry out intensive research and have expert opinions prepared, especially before deciding on a site.

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Table 5.2  Nationwide overview of contaminated site statistics in Germany Status

Seq. Number

Areas suspected of containing contaminated sites

Former waste disposal sites suspected of containing contaminated sites

Former industrial sites suspected of containing contaminated sites

Contaminated sites

1

1.1

1.2

2

Baden-Wuerttemberg

12/2015

15,220

1808

13,412

2583

Bavaria

03/2016

15,688

10,449

5239

1036

Berlin

06/2016

5600

438

5162

835

Brandenburg

05/2016

19,312

6912

12,400

1403

Bremen

06/2016

3511

16

3495

431

Hamburg

07/2016

1621

269

1372

564

Hesse

07/2016

1184

623

561

483

MecklenburgWestern Pomerania

06/2016

5474

2424

3050

898

Lower Saxony

07/2015

94,655

10,282

84,373

3907

North RhineWestphalia

02/2014

25,292

6349

18,943

3100

RhinelandPalatinate

07/2016

12,258

10,408

1850

612

Saarland

07/2016

5309

1627

3682

597

Saxony

05/2016

19,064

6453

12,611

478

Saxony-Anhalt

05/2016

14,817

4644

10,173

1065

Schleswig–Hol- 12/2015 stein

10,383

1778

8605

271

Thuringia

11,494

3538

7956

782

06/2016

Contaminated sites essentially represent a risk, which can, however, be quantified with some time and financial effort. There are risks especially regarding the following aspects: • claims for damages by third parties • criminal law aspects (especially in the case of non-remediation or concealment) • exploration risks (due to lack of certainty that all contaminated site hazards have really been identified in the course of an investigation) • remediation (freedom from contaminated sites was assumed in advance)

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5.5 Micro-Location Factors

• • • • •

remediation success (the recommended procedure may not be successful) longer construction time (due to investigations and remediation) project cost increase (due to investigations and remediation) disposal risk (due to remediation) hedging risk (due to continuous measures).

Sites with a previous use may be suspected of being contaminated. However, the difference in the assessment of the risk in question depends on the respective degree of knowledge gained. In most industrialized countries and emerging economies, however, an exemption from the obligation to remediate is rarely possible (Franz, 2007, S. 324). A systematic approach to contaminated site investigations is carried out in three stages, illustrated in Fig. 5.6 (Neumaier & Weber, 1996, S. 46). • Phase I (Survey): In the first phase, a so-called desk study is carried out, which, by interviewing those directly and indirectly affected (employees, neighbors, etc.), attempts to show the site history and environmentally relevant events (production, storage, and disposal processes as well as accidents) as completely as possible (Russ, 2009, S. 66).

Phase I Survey

Area suspected of contamination Survey

Phase II Hazard assessment

Initial assessment

No contaminatation

Contamination suspicion persists

Contamination

Overview survey

Detailled analysis

Assessment Contamination suspicion persists

Assessment

Cleanup yes / no no

Phase III Cleanup and monitoring

yes

Planning of cleanup Cleanup

No further investigation, no measures taken

Observation Monitoring

Fig. 5.6   Workflow of contaminated site management (schematic)

Success control

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5  The Location Criteria for Corporate Real Estate

• Phase II (Hazard assessment and investigation): Based on the preceding desk study, an assessment of potential risks, hazardous substances to be investigated, and procedures to be applied can be made, and the areas likely to be affected can be narrowed down. Then, a soil and groundwater investigation of the areas likely to be affected or important from a site perspective is carried out. Samples are taken and analyzed in approved laboratories. As a result of the investigations carried out, the expert report should make statements about the degree of any contamination present and its effects on the site and its surroundings, as well as possible safeguarding and cleanup measures. • Phase III (Remediation and monitoring): The third phase comprises the safeguarding, remediation, and monitoring measures according to the respective agreement. An overview of common procedures is given in Figure 5.7 (May, Eschenbaum, & Breitenstein, 1998, S. 154). Internationally, there are very different legal requirements in this regard. In developing countries (e.g., India), but also in many industrialized nations (e.g., Japan), environmental legislation is rather rudimentary from a Western perspective. Countries

Contaminated site avoidance of contamination

avoidance of spread of contamination

Cleanup

Safeguarding

off-site

on-site

soil exchange

in situ soil treatment

incapsulation vertical sealing

horizontal sealing surface sealing

with soil excavation

sealing of base subsequent sealing of base

without soil excavation displacement of the soil microbiological

on-site

in-situ

biobed method / construction of aggregate material pit; bioreactors

rinsing method; gassing method; biological agriculture; geotech methods

reduction of permeability

immobilization

in-situ injection method

walkable

extraction

on-site

hydraulic measures

on-site

in-situ

local containment and deviation

capture and treatment

chemical

in-situ

on-site

in-situ

oxydation / reduction; photolysis; polyxerization; vitrification

stabilization; solidification

drying

active

not walkable

thermal

on-site

passive

distillation

rotary furnace

incineration fluidized bed furnace

gassing

degassing

infrared continuous furnace

Fig. 5.7   Remediation and monitoring measures for contaminated sites

soil air extraction

soil air rinsing electrical electro-osmosis electrophoresis electrolysis

5.5 Micro-Location Factors

105

such as Japan and Taiwan have tried to close this gap in the last two years. However, the laws passed there still leave many questions unanswered. At the same time, in countries like the People’s Republic of China, environmental limits are formulated quite strictly. However, there is sometimes a wide gap between the legal requirements and the reality of their implementation. When settling in a new location or acquiring existing sites, western industrial companies, in particular, are meticulous about meeting the highest possible environmental standards. Internationally, there are many different sets of regulations, such as WHO lists (World Health Organization; see http://www.who.int), the so-called Dutch List, US-American lists by ASTM, the German Federal Soil Protection Act (BBodSchG), etc. But even below the national level, there are often still different regulations at regional or local level. The primary objective of safeguarding or remediation is to avert potential hazards. Due to their familiarity, two different systems are mostly used: • US standards of the American Society for Testing and Materials (ASTM International, 100 Bar Harbor Drive, P.O. Box C700, Westconshohoken, PA, 19428-2959, USA; see www.astm.org) • ASTM D6008: Standard Practice for Conducting Environmental Baseline Surveys • ASTM E1527: Standard Practice for Environmental Site Assessments: Phase 1 Environmental Site Assessment Process • ASTM E1528: Standard Practice for Limited Environmental Due Diligence— Transaction Screen Process • ASTM E1903: Standard Guide for Phase II Environmental Site Assessments • the so-called Dutch list of the Ministry of Housing, Spatial Planning and Environment, Directorate-General for Environmental Protection, Department of Soil Protection, The Netherlands). The Dutch List sets limits for a large number of substances in the form of upper limits and intervention values. The approach of the American standards is in principle based on an analysis of the hazards and risks that could be posed by the substances to be encountered in their respective environment. While the American system makes more sense from a technical point of view and does much more justice to the respective circumstances, it is usually quite difficult to communicate in countries with a less developed understanding of the environment. Here, people like to fall back on the Dutch List, in which the values determined in the soil and groundwater lab analysis are simply compared with the listed limit values.

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5  The Location Criteria for Corporate Real Estate

5.5.5 Availability of Area Area Planning The area required is one of the key location factors. Determining the required area as early and precisely as possible is of particular importance for a focused site search. This is usually juxtaposed with the very early and thus rather approximative planning status during the site evaluation phase. In the case of production plants, the basis for a plausible location decision with a view to the long term is the plant master plan (Schmigalla, 1995, p. 201). As a long-term planning document, it represents the company’s binding master plan for the structural use of the site. However, this also must consider the areas outside the factory premises that may be equally relevant for production. An exemplary company site including an explanation of terms is shown in Fig. 5.8 (BASF SE, Engineering & Maintenance, 2017). What is important here is the distinction within the premises between • the delimited production area (core area) of a specific production facility (ISBL, inside battery limit) • the outside battery limit (OSBL) facilities that exist exclusively for this specific production plant, and • the general infrastructural facilities of a company used by all production facilities. Such planning is an iterative process that begins with a long-term needs assessment and is adjusted through several optimizing planning steps from ideal planning to real planning. This process is visualized in Fig. 5.9 (Kettner, Schmidt, & Greim, 1984). Site evaluation takes place at an early stage of project development. Therefore, only very rough assumptions can usually be made for area planning. A calculation of the area dimensioning is therefore based either on comparable projects or plants, or on key figure systems (Schmigalla, 1995, S. 231). (5.3)

A = XBasis × FFKZ Legend: A = area requirement XBasis = base size FFKZ = area index The following key figure systems can be cited as examples for this: [ ]     2 2 3 • A m2  = production capacity at , ma  × FFKZ (mt ) , ( mm3 ) a

a

    • A m2  = number of machines [St u¨ ck] × FFKZ m2 St u¨ ck  2   2 m • A m  = number of employees [FTE] × FFKZ FTE

blockfield limit

block field

dedicated tank

main piperack, street, etc.

Fig. 5.8   Schematic plant plan and definition of terms

Red line

central tank farm

OSBL

Tank farm

infrastructure corridor

Battery Limit

central cooling towers

Site

admin building

OSBL or Infra (depends on site)

Infrastructure (Infra)

Outside Battery Limit (OSBL)

Inside Battery Limit (ISBL)

port tank farm

Off-site

external pipe rack with external pipes

production plants ISBL jetty

5.5 Micro-Location Factors 107

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5  The Location Criteria for Corporate Real Estate

Factory Master Plan (Whole Operation)

Preparatory Work

Long-term production program (basics for planning) Establishment of areas (production, warehouse, admin.) Design of relationships (material, personnel, energy)

Ideal Planning

Ideal design of whole operations

Area determination

Planning steps - zoning - functional axis - grid - shape of building - phase planning - etc.

Schematic of whole operations to scale Restrictions (property, buildings, laws, regulations) Regulations on factory master planning

Analysis + assessment

Real Planning

Optimized factory master plan

Fig. 5.9   Creation of a factory master plan

Particularly in the industrial sector, a major investment is rarely realized in one go due to the very high financial outlay of an investment and the associated entrepreneurial risks. The more common approach is by phased investments in which plants are expanded in a modular fashion and additional production lines are gradually added to

5.5 Micro-Location Factors

109

production sites. This means that two aspects are of particular importance in terms of space requirements—the immediate and the long-term space requirements. The immediate space requirement is determined by the intended initial investment. However, to optimize production processes, it is important to consider possible expansion and supplementary concepts already in the site search phase. Here, too, the possible space requirements must be estimated and taken into consideration as a location factor. However, the land does not have to be acquired immediately. Available options are described in Sect. 5.5.7. In addition, other facilities that are essential for the planned production and are located outside the ISBL/OSBL areas must also be taken into account, if necessary, in the course of the analysis of the area requirements (see Fig. 5.8). These can be indispensable infrastructure facilities, possible suppliers (e.g., exclusive suppliers in so-called just-in-time processes), but also handling and logistics facilities operated by third parties (e.g., contract logistics companies, port facilities, port fuel tanks). The rough structuring and dimensioning of the factory concept ultimately leads to the preparation of a zoning plan. This also takes into account the possible expansions. Such a zoning plan is drawn up in the form of a grid, whereby rectangles or squares are best suited as basic planning grids. A coarse zoning plan can be refined by choosing suitable grid dimensions for subsequent planning and detailing steps. Common zoning measures for simple geometric divisibility are, for example, 36 m, 50 m, and 60 m (Wiendahl, Reichardt, & Nyhuis, 2009, p. 375). This allows for building dimensions of 18 m and construction grids of 1.20 m to be derived. These grid systems are based on DIN 4172 and ISO 1791 standards. The DIN 4172 grid is based on the small-scale measure of 2.5 cm. Based on this, the grid uses a basic dimension of 12.5 cm or a grid of 2.5 m (Grundig, 2009). The German basic dimension is defined as 1/8 of a meter (i.e., 12.5 cm). Internationally, however, grid dimensions of 100 mm (module) or 600 mm (large module) are in use (Gienke & Kämpf, 2007, p. 363). Equally widespread is the so-called Euro-module with a grid dimension of 1.20 m (Dangelmaier, 2001, p. 253). In summary, a site masterplan comprises the following information (Schmigalla, 1995, S. 201): • • • • • • • •

representation of the property and its boundaries (according to the cadastral register) representation of the topography of the property (contour lines) representation of natural conditions (water bodies, vegetation) representation of areas with contamination-specific relevance (sampling and remediation areas) representation of use zones (zoning plan—areas or blockfields and their specific type of use) representation of plant roads, supply and disposal corridors, and pipelines representation of the building areas (with type and extent of building use) representation of expansion areas and expansion stages.

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5  The Location Criteria for Corporate Real Estate

Investment Density In general, it can be stated that in developed industrialized countries, due to corporate restructuring, rationalization, and relocation to regions with lower cost levels, industrial land demand has decreased (Schulte & Bone-Winkel, 2002, p. 180). At the same time, rapid industrial growth and the aforementioned relocations are leading to a shortage of land, especially in emerging countries. This shortage of land is also partly due to land speculation. For example, in the course of our own research during a location analysis in Dubai, despite the existence of several industrial parks with numerous undeveloped areas before the beginning of the financial crisis in the fall of 2008, not a single plot of land was for sale. For this reason, another parameter is sometimes encountered internationally—the so-called investment density. This is a—mostly governmental—control parameter for commercial or industrial settlements. The investment density represents the ratio of the investment volume to the occupied land area. This parameter, usually used as a minimum limit, is often intended to reserve certain areas for capital-intensive investments (e.g., heavy industry), and to prevent their use for less capital-intensive but land-intensive investments (e.g., logistics). This is an interesting control parameter in designated industrial areas.

dInvest =

CGIK A

(5.4)

Legend: dInvest = investment density [monetary unit/m2] CGIK = total investment costs of the potential project [monetary unit] A = area required for the potential project [m2]

5.5.6 The Nature of the Property Technical Aspects of a Property The usability of a plot of land is influenced by its geometric characteristics as well as the condition of the soil and possible existing structures on the property or in the neighborhood. Aspects of monument protection must also be taken into account. These are presented below. Plot Layout As already shown, the determination of the land requirements leads to the specifications of a site masterplan. For efficient development, an optimum relationship between the length and depth of the plot is just as relevant as the angularity of the plot boundaries in relation to each other (Wiendahl, Reichardt, & Nyhuis, 2009, p. 385). The ideal plot boundaries can be derived from the planned development, including its possible expansion, as well as the minimum and safety distances required by

5.5 Micro-Location Factors

111

building regulations and building technology. Irregular layouts and unfavorable dimensions clearly restrict the property’s buildability. In this context, it becomes apparent that a rectangular plot layout with a comparatively small aspect ratio leads to compact and thus optimum use of the plot. Of equal importance is the location of the site in terms of access. The larger the road frontage of the property, the more planning design options and flexibility are possible regarding the utilization of the property, e.g., through several factory gates allowing for separation of access and egress to optimize logistical handling processes. Property Topography Another fundamental site criterion is the condition of the terrain surface. Geomorphography (the science of landforms) distinguishes the types of the earth’s surface into basic forms (macro-scale) and detailed forms (micro-scale). The large-scale forms are synonymous with the common concept of a landscape, which can take the following forms (Sonklar, 1873, S. 29 ff.): • • • • • •

lowlands, coastal forms, and estuaries hilly country, sedimentary basins, and plateaus mountains, mountain ranges, and different valley shapes moraines and other glacial landforms rift valley, escarpments, and other tectonic formations caves.

The small forms, on the other hand, are distinguished as follows (Sonklar, 1873, S. 53 ff.): • • • • • • •

sliding slope slope, crevice, fault dam, dyke dune precipice, quarry, pit rock, rock formation hollow, gorge.

The meso-scale as an intermediate form is described by such formations as mountain, valley, hill, plain, etc. Assuming that industrial sites are usually sought on scales of 2 ha to 2 km2, topographical considerations on the micro- and meso-scale are relevant. Flat areas with a maximum slope of 2 to 3 percent for drainage of surface water are advantageous. Slopes are considered disadvantageous, because on terraced areas, material flows can only be optimized to a certain extent (Wiendahl, Reichardt, & Nyhuis, 2009, p. 385).

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5  The Location Criteria for Corporate Real Estate

Also, such topography incurs significant additional costs due to ground shaping and drainage. Another important aspect of topographic considerations is the site connection to transport infrastructures (Vaughn, 1976, p. 145). This concerns in particular the routing of roads, and tracks for a railway connection. Building Ground The existing topography may immediately allow for conclusions to be drawn about the building ground. In a greatly simplified rough analysis, for example, two different starting points can be found according to McPherson (McPherson, 1995, S. 95): • Plains or plateaus often do not have rocky subsoil. The building ground thus requires special constructive measures and additional costs for production types with heavy loads. • Hilly and mountainous terrain often have subsoil that is too rocky. The building ground thus requires special construction measures and additional costs for the laying of pipes and the construction of infrastructures. This already indicates that the assessment of the building ground is an essential starting point for the site selection. This is further supported by the fact that the costs for excavating the building pit and for the foundation works account for • approx. 20 percent of solid construction buildings in the case of industrial and production buildings (cost groups 310 and 320 according to DIN 276) (BKI, 2010, S. 473), and • approx. 25 percent of the total costs of the building construction (cost groups 300 ff.) for buildings in skeleton construction method (BKI, 2010, S. 481). Therefore, a qualified building ground expertise should always be prepared at an advanced stage of the site evaluation. In addition to the actual soil conditions, this should also take into account any possible influences by • groundwater and • mining activities. Building ground with no or only limited load-bearing capacity ultimately requires costintensive ground improvements. Some examples of this are (Reichel & Glatte, 1989, S. 38): • • • •

soil compaction soil stabilization measures increased requirements for the foundation (pile foundations) up to the replacement of unsuitable soil materials.

5.5 Micro-Location Factors

113

Existing Obstacles and Buildings Existing buildings and facilities on the proposed site—both above and below ground— are common challenges for project development. In a first step, it would have to be examined whether and to what extent they are still in use and who is the user in such a case. In a subsequent step, it would then have to be evaluated to what extent such facilities can be removed or whether they can be included in the structural planning for the project with reasonable effort. In the case of demolition, compensation may have to be paid to the previous user or owner, or the latter may be involved in the costs of demolition. A special case is the protection of historical monuments. Since finds of historical significance lead at least to a significant delay in construction, if not to a complete halt to construction, a site evaluation must always carefully examine whether such a risk exists on the property in question. However, environmentally relevant aspects on the existing property as well as on neighboring properties can also be an obstacle. This was discussed in Sect. 5.5.4.

5.5.7 Land Rights Legal Aspects of a Property Before individual important components of the availability of building land and the possibility of erecting structures and plants can be considered, some basic questions regarding the possibility of land ownership must be addressed. The basis for the construction of a building and thus ultimately the realization of an industrial project is the existence of a plot of land. Its conceptual scope—especially with regard to the legal implications concerning the rights and obligations arising from ownership, possession, and use of a plot of land—must therefore be examined in advance in the light of local legislation. This concerns in particular the perception of land not only as an area, but as a three-dimensional space. The horizontal extent of a plot of land usually refers to a precisely surveyed and cadastrally described part of the earth’s surface (Baur, Stürner, & Baur, 1999, S. § 15, Rn. 18). In addition to the area description, however, the vertical range is also relevant. This is not only true against the background of the availability of mineral resources. It is of particular interest for project developments in view of the jurisdiction for underground construction, impacts of mining activities, possible contamination of soil and groundwater, but also rights to airspace (note: in Germany, air rights are regulated according to the Air Traffic Act (LuftVG)). In Germany, for example, there is no defined limitation regarding vertical extent— above and below the earth’s surface (see Art. 905 German Civil Code: Limitation of Property).

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5  The Location Criteria for Corporate Real Estate

Ownership of Real Estate Next to the spatial delimitation of a plot of land, its condition as well as its availability and especially the possibilities of access under ownership law are also of particular interest. Especially the question of ownership of land is a very important basis for a sound investment. This issue is important because, on the one hand, ownership represents the highest protection against access by third parties and, on the other hand, is relevant in project financing as collateral for banks in the context of a loan. In principle, it should be noted here that, from an international perspective, property law varies greatly from country to country. Unlike, for example, service contracts (engineering contract, EPC contract, etc.), or purchase contracts (machinery, plant components, etc.), which are usually relatively freely and individually negotiable within the framework of the legal conditions, the limits for real estate contracts are usually quite narrow. An EPC (engineering, procurement and construction) contract is understood to be a general contractor contract in industrial construction. In Germany, as in most countries in Europe, the possibility of private ownership of land is a matter of course. This also applies to clear, transparent, and legally secure forms of proof of ownership, for example, via a land register. Basically, the rights to land under the German legal system can be subdivided as follows: • • • •

property usage rights purchase rights security and utilization rights.

Figure 5.10, following Gondring, visualizes this structure (Gondring, 2009, p. 99). Under the German legal system, these rights can also be secured in rem. By being entered in the land register, they are thus documented in a very transparent and legally secure manner, and thus, easily verifiable. In Germany, land and building are inseparably linked, i.e., the owner of the land is in principle also the owner of the building. This can only be changed subsequently, e.g., by granting a heritable building right. Note: In Germany, according to Art. 96 of the Civil Code, the building is an integral part of the land. However, the Heritable Building Right Act Ordinance (ErbbauVO) allows for a legal separation of building and land for a limited period of time. The heritable building right is an alienable and heritable right to have a building on/under another's land. The structure can be alienated and encumbered without the land being alienated or encumbered. The heritable building right is a so-called ‘right equivalent to real property’, which is documented with its own land register sheet (heritable building right land register). The heritable building right is established by agreement (notarized contract) and entry in the land register (highest-ranking position in Section II) in accordance with Art. 873 German Civil Code; at the same time, a separate land register sheet is created.

115

5.5 Micro-Location Factors

LAND RIGHTS

Property

Usage rights

Purchase rights

Easements (piping rights, rights of way)

Right of first refusal

Limited personal encumbrances

Reservation

Usufruct

Right to buy and resell

Security and exploitation rights

Real estate lien (mortgage, land charge, annuity charge)

Land charges (ground rent) Leasehold

Usage rights

Fig. 5.10   Overview of land rights

While this principle is common, it is not found everywhere. Japan can be cited as an example. In Japan, ownership of the building, also in the form of floor level ownership (i.e., not of the entire building, but comparable to a condominium, also only with parts of the building), is possible in principle without the fractional ownership of the land that is common in Germany. This is why separate registers exist here for land and buildings (land register and building register). However, in Japan there is also usually a relationship between land and building. This is usually regulated in contractual form, e.g., by means of a long-term lease agreement. Even French law, on whose Code Civil the German Civil Code is essentially based, only presumes a connection between the land and the building on it (Pfleiderer, 2003, p. 38). According to French law, the landowner is only deemed to be the owner of the building on the land until proven otherwise (French: présomption de proprieté au profit du propriétaire du sol)—see Art. 93 German Civil Code and Article 552 f Code Civil. This presumption applies not only to buildings but also to all structures (French: construction et ouvrages sur un terrain), cultivated areas (French: plantations), and fixtures (French: ouvrages dans l'interieur). Thus, according to general legal opinion in France, independent building ownership can not only be agreed upon for a limited period of time in the sense of a heritable building right but can also be possible for an unlimited period of time without a special legal regulation (Pfleiderer, 2003, p. 38).

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5  The Location Criteria for Corporate Real Estate

In the context of a global location evaluation, it quickly becomes clear that these rules are by no means a matter of course. In Russia, for example, ownership of land was introduced only a few years ago. Despite this legal possibility, however, it is virtually impossible to acquire ownership of a plot of land within Moscow, for example. Usually, the state grants a long-term lease of 49 years here. In principle, it is true for all former socialist countries that most of the land is still owned by the state and its use is often only possible through legal constructions comparable to heritable building rights (see below for an explanation) (Mayrzedt, Geiger, Klett, & Beyerle, 2007, p. 670). Globally, such a state monopoly over the ownership of land and the granting of longterm leases—comparable to the German heritable building right—is very common. It is therefore always advisable to enquire intensively about the land purchase procedures in the respective country prior to an acquisition. Particular attention should be paid to: • • • • •

registration (in rem security in a title register or land register) transfer lease mortgaging treatment of rights of way and pipeline rights.

Other aspects to be examined are the responsibilities for water bodies that may exist on the property as well as groundwater. For example, water bodies on the surface may well be regarded as independent plots of land or as parts of the land. In any case, it must be determined whether these are parts of a property or not. This results in individual claims, but also obligations. Note: In principle, water bodies in Germany, for example, can be privately owned. According to Section 89 (1) of the Basic Law, only public property and certain waterways are excluded. Coastal waters are also excluded.

Likewise, it should be determined to what extent groundwater is covered by the ownership of land. In Germany, for example, the ownership of groundwater has been quite deliberately excluded from the Civil Code (Franz, 2007, p. 212). Müllensiefen, for example, has dealt with this question in detail and was unable to derive any connection between land ownership and ownership of groundwater from other regulations too (Müllensiefen, 1997, p. 117 ff.). Knowledge of this is important to be able to clarify questions of responsibility for groundwater contamination, which may also originate from deposits on other properties, but also the use of groundwater for water supply by means of wells.

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Checking the Ownership Situation The basis of the land acquisition process is to check whether the seller of the land is entitled to do so at all, i.e., whether they are in possession of the land or the land use right at all and, if so, whether they are allowed to sell or transfer it at all. These very simple-sounding points are a matter of course. However, in practice, not only in developing and emerging countries, checking them often results in unpleasant surprises. It can happen that the party acting as seller is not even the owner of the property or has not yet secured the rights or ownership conclusively and without restriction. Even the fact that the seller is a public authority does not offer protection against damage. In such a case, it would have to be examined how realistic an acquisition from the potential seller is and in what period of time the seller can obtain the land rights necessary for the sale. Notes on Land Acquisition by Foreigners Furthermore, especially in the case of project developments and location settlements abroad, it should be checked whether the investor, as a foreign company, is allowed to acquire property at all. There are numerous countries which, in contrast to Germany, have established restrictions on foreign ownership of real estate (e.g., Switzerland) or prohibit it in principle, as for example Thailand (Godau, 2006, p. 141). For example, while many Asian countries have introduced reforms to facilitate foreign investment in the wake of the Asian crisis after 1997, there are still legal restrictions on the acquisition of land ownership or use rights by foreigners or foreign-controlled domestic companies (Mayrzedt, Geiger, Klett, & Beyerle, 2007, S. 671). The current situation in the respective country must be examined in detail. This also includes the definition of a foreigner, which can differ. It often refers to natural persons and legal entities, i.e., companies, with a foreign shareholding of ≥ 50% (Godau, 2006, p. 140). It should also be noted that in many countries a distinction is made between the ownership of a building or part of a building (e.g., condominium) and the ownership of land. The background is often the aim of protecting the land from foreign land speculation. Unfortunately, the practice is that such protection mechanisms are circumvented with local middlemen—at least speculation is not prevented that way. Securing Rights to the Property Even in the early stages of a project, it is important to be clear about the space requirements. This not only has an influence on the choice of location, as explained above. A clear idea of the space requirements is also necessary to secure a site of adequate size at the location (e.g., in a business or industrial park) in good time. The operators or developers of such sites always have preferences among potential investors, but here too the principle first come, first served applies. Of course, the same also applies to individual sites. Here, too, a property owner who is willing to sell has no interest in being stalled throughout the entire project evaluation process, running the risk

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that the sale ultimately falls through, while in the meantime having rejected other possible buyers. Of course, an investor could acquire the property immediately. But they, too, will of course first have to carefully evaluate the entire scope of the project. This process, both the planning on the engineering side and the securing of project financing, takes quite some time, as shown in the previous chapters. Moreover, experience shows that many a project was delayed or even completely stopped in the course of such a preparatory process. Therefore, it makes sense for the seller and the investor to at least agree on a temporary arrangement regarding the land in question. In principle, there are five different possibilities to address such a problem, the availability and legal protection of which varies from country to country and thus has to be examined in each individual case. Preliminary Contracts and Letters of Intent A preliminary contract is a contract that ultimately documents the obligation to conclude a main contract at a later date. This is a contract under the law of obligation, i.e., performance is enforceable. Of course, the preliminary contract can also be drawn up in such a way that only one of the contracting parties is obliged to conclude the (future) contract. Usually, various basic provisions of the future contract are already laid down in the preliminary contract. Since a preliminary contract is drawn up in particular from the perspective of a possible withdrawal of one or both contracting parties, this specific aspect must be clearly regulated. This applies in particular with regard to possible claims for damages. In contrast to the main contract, in Germany the preliminary contract does not necessarily have to be notarized, due to the freedom of contract prevailing here. However, it is advisable despite the additional costs incurred. It is also advisable to involve the notary designated for the main contract for the preliminary contract as well. In this context, the so-called letters of intent (LOI) or memorandum of understanding (MoU) should be mentioned. Such declarations, usually entered into at the beginning of a project between the parties involved, have only the meaning implied by their name. Such declarations of intent do not constitute a legal commitment, let alone an enforceable contractual agreement. At best, one can hope for a moral inhibition threshold among the signing parties. Making such an LOI or MoU explicitly binding by means of a clause (so-called Binding Letter of Intent) is possible. However, this document no longer deserves to be called a letter of intent. One should honestly admit that a document signed in this way is actually a signed (pre-)contract—no matter what title the legal counsel in question has chosen. A legal document is defined by its content, i.e., the arrangements made, and not by its name.

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Right of First Refusal The owner of the property grants the interested party a right of first refusal. In the event of a possible purchase offer from a third party, the person entitled to preemption must be informed of this by the owner of the property (the so-called first option). The preemptor can decide to buy the property before the others but is not obliged to do so. Likewise, the third party can only acquire the property if the preemptor does not exercise the right granted them. It is of particular interest if such a right of first refusal can be fixed and thus legally secured not only by a written agreement but also by a security in rem, e.g., as in Germany by registration in Section II of the land register. In the case of real estate, the deadline for exercising the right of first refusal is two months after receipt of the notice according to Art. 469 (2) German Civil Code. However, other terms may be contractually agreed. The period is usually started by the notary by notifying the preemptor of the conclusion of the contract between the seller and a (different) buyer. Limited Purchase Offer With a limited purchase offer, the investor makes a purchase offer for a clearly defined period of time. This is usually linked to a down payment. The settlement of the down payment in the subsequent process must be arranged individually. It is customary to offset it against the purchase price at the time of the final conclusion of the purchase contract. Conversely, it is also possible for the landowner to repay the deposit in full or in part if the project is not realized. Especially in the case of non-realization, the rules are usually linked to the reasons for failure and the fault of the respective contracting party. The latter could also result in claims for damages. In this case, it makes sense to agree on paying the amount into an escrow account, e.g., through a notary or a law firm. Otherwise, there is a risk that the amount will not be repaid or will be repaid late. Purchase Agreement with Suspensive Effect However, it is also possible to negotiate and conclude the purchase agreement, but to postpone its entry into force until a later date. For example, it makes sense to postpone the entry into force until the final decision on the realization of the project. In practice, however, this is usually linked to the fulfilment of precisely defined milestones (e.g., the obtention of the financing or the granting of the building permit). In addition, time limits are usually agreed. A purchase agreement with suspensive effect ultimately establishes a right to purchase. This right to purchase establishes the claim to a future transfer of ownership of a property. It can be secured in rem by priority notice in the land register. Furthermore, the claims arising from a purchase right are transferable. However, in Germany the right of purchase is subject to a limitation period of ten years in accordance with Art. 196 of the Civil Code.

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The land transfer tax (Germany) only becomes effective when the purchase contract comes into force. Purchase Contract with Reservation of Withdrawal The contract of sale with reservation of withdrawal is a fully fledged contract of sale which also comes into force immediately with or shortly after the conclusion of the contract. It is merely provided with a reservation of withdrawal, i.e., one of the contracting parties can withdraw from the contract for precisely identified reasons to be detailed in the contract. As with the purchase contract with suspensive effect, this makes sense from a project developer’s point of view, especially if essential project conditions do not materialize, e.g., if a building permit is not granted. The real estate transfer tax (Germany) falls due when the purchase agreement comes into force. Therefore, from the project developer’s point of view, the purchase agreement with suspensive effect is preferable, unless a substantial increase in real estate transfer tax is to be expected in the near future. Option Agreement or Reservation Agreement An elegant solution, especially with regard to the medium-term securing of expansion areas at already existing locations, is the conclusion of an option contract for a limited period of time. With such a contract, the investor reserves a certain plot of land for a certain period of time without, however, already having precise plans for development in the near future. This makes sense especially for commercial and industrial investors who, on the one hand, want to ensure the long-term expandability of their initial investment, but, on the other hand, do not want to acquire large areas immediately due to the lack of assessability of the market. As such an option is linked to payments (usually 3% to 10% of the land value per year), the investor also has the chance to spread out the payments and thus not tie up too much capital too early. The rules on the possible crediting of payments in the event of land acquisition are essentially the same as those for the limited purchase offer. Securing the Rights to Land and Building The existence of a reliable land registry system, including the possibility of registering land rights with effect vis-à-vis third parties, as well as good faith protection, are further important prerequisites for a secure land acquisition. However, this legally binding registration of ownership claims and other rights (see below) to a plot of land and the associated structures, called security in rem, is not a matter of course, especially in developing and emerging countries with legal systems that are still being established. Such rights are often not available or only available to a limited extent there. In this context, note that different registrations may well apply to land and buildings. This also includes dealing with piping rights and rights of way. This aspect is particularly important in the industrial sector. Industrial plants are often connected by pipelines

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121

to raw material suppliers, customers, and tank farms, but also to infrastructure supply facilities (water, wastewater, natural gas, industrial gases, etc.). This form of connection is of existential importance for the site. The highest possible legal protection of such routes—underground as well as above ground or on pipe bridges—is therefore a necessary goal. Insofar as the land law of the country in question allows it, the goal should be to secure them in rem. The same applies to rights of way, e.g., in the form of plant access roads. Conversely, such rights can also have a negative effect on the usability and value of a property as third party claims, restrictions, and encumbrances. In this case, the type and scope of the restrictions as easements in rem or contractually secured rights must be examined in advance of a settlement. Mortgageability In parallel to the search for a location, the financing of the project is also considered at an early stage. The basis for this is the estimated or calculated project costs. These are rarely borne by the company alone. Project financing by banks therefore plays a major role (Dietrich, Kasch, & Zühlke, 2009, p. 69). However, they need collateral to secure the financing they provide. The property itself can be one form of such collateral. Therefore, it is important for the financing of the project that the land can be mortgaged. As an example of this problem, consider the land law situation in the PRC, where two land rights are important for industrial projects, • the granted land use right (GLUR), which is comparable to the German heritable building right, and • the allocated land use right (ALUR), which is comparable to a lease. According to Chinese land law, mortgaging the ALUR is generally not possible. The GLUR, by contrast, can be mortgaged (Glatte, 2005, p. 162). In this case it is important to note that it is not the ownership of the land (state property) that can be mortgaged, but only the temporary right to use the building land (see below) as well as the structures and the objects connected with the land. However, a prerequisite for mortgaging the right to use the land is that the loan granted is intended for development and building on the property (Diem, 2000, p. 183). The agreement in question can, however, be secured in rem by entry in the land register. Restraints on Disposal The long-term and unrestricted availability of land through the possibility of acquiring ownership or at least long-term rights of use, and existing renewal options for such ownership or rights of use, is important. It is precisely the long-term nature of land rights that is of decisive importance for industrial enterprises. This becomes clear, for example, when taking a close look at the BASF site in Ludwigshafen (see Sect. 4.6.9). If in 1869,

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BASF had only received land use rights for 50 years according to the Chinese model, the corresponding rights would have expired long ago. The long-term and unrestricted availability of land is sometimes quite problematic in foreign business. Unrestricted property rights, a matter of course in Germany, are frequently unknown. Often only time-limited land use rights are available, which can best be compared to a German heritable building right. The background to this is, among other things, the British system of land law, which was globally widespread during the colonial era, according to which—in purely formal terms—the land belongs to the royal family (the crown) (VDP, 2009, P. 19). The crown granted temporary leases and rights of use (crown leases). Some of these were granted for very long periods, e.g., 999 years. Even though private ownership of land has existed in Britain for a long time, this system has not only survived in many countries, but has been adapted and continued locally. Examples of such time-limited land rights in the Asian region are: • • • •

the granted land use right for 50 years in the People’s Republic of China long-term leasehold over 99 years in Malaysia long-term leasehold over 30 years in Singapore various forms of long-term leases in Hong Kong (formerly 999 years, 99 years, or 75 years, more recently usually 50 years) • a building right (Indonesian: Hak Guna Bangunan) comparable to the German heritable building right granted for 30 years in Indonesia. Note: Only one structure in Hong Kong, the historic St John’s Cathedral, stands on freehold land.

Furthermore, it is important to consider certain property law aspects, which may only be relevant in the medium or long term, as early as the site search phase. This includes that there are no restrictions on the disposal of the property, e.g., in terms of mortgageability (see above), transferability, and third-party usability (e.g., through leasing) of the land (Gondring, 2009, S. 78). This situation is particularly common in state-owned industrial zones, which either make land available specifically for certain investors or subsidize the acquisition of land for certain types of investment. Restrictions on the acquisition or disposal of shares are intended to exclude investments of other types or investments not subsidized by the state, as well as land speculation. Such restrictions can be a hindrance, especially in the case of internal company restructuring, e.g., the sale of business divisions, which subsequently make it necessary to separate ownership of fixed assets within existing site structures. However, the same also applies with regard to eligibility as collateral for financing purposes, as any restrictions lead to deductions when determining the property value relevant for lending (mortgage lending value) (Kleiber & Simon, 2007, S. 483 ff.).

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5.5.8 Urban Land Use Planning and Building Legislation Spatial Planning and Urban Land Use Planning In every country, large-scale spatial planning as well as more locally effective urban land use planning are essential elements for controlling the settlement of areas and their designation for certain uses. In Europe, efforts are already underway to set guidelines and framework conditions in the field of spatial and landscape planning with the help of a European spatial development concept (European Commission: European Spatial Development Perspective, EDSP, May 1999). For the most part, however, these issues are still regulated purely at the national level. Authorities deal with spatial planning within the respective state hierarchy. Therefore, we also speak of administrative levels here. A distinction is made between the • • • • •

transnational level (e.g., European level) nation state level provincial or federal state level regional level, and the municipal level.

Each of these individual levels has certain responsibilities and processing depths. In principle, however, spatial planning is supra-local. It contains goals and principles, i.e., it is a rough plan that only directly binds the planning by the administration. At the regional and municipal level, the planning requirements lead to urban land use planning. It is the most important planning tool for guiding and ordering the urban development of the lowest administrative units, especially of a municipality. The task of urban land use planning is to determine the structural and other permissible uses of the land in an area under consideration, usually a municipality. In Germany, this determination is carried out in two stages by means of official procedures, which are comprehensively regulated in the Building Code (BauGB). It distinguishes between the preparation of a land use plan for the entire municipality (preparatory land use plan according to Sec. 5 to 7 BauGB) and individual zoning plans for spatial sub-areas of the municipality (legally binding land use plan according to Sec. 8 to 10 BauGB). Whereas the land use plan only contains representations of the main features of land use that are binding on the authorities, the provisions of the zoning plans regulate the structural and other use of land in detail and in a generally binding manner. Internationally, there are often similar planning documents, whereby it is not infrequent for the very strict distinction between preparatory and legally binding land use plan to be blurred under the generic term master plan. Irrespective of country-specific regulations, knowledge of the local spatial and landuse planning system is important to be able to assess possible planning risks, the approvability of the project itself, and, ultimately, the availability of building land and the extent

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of its usability. A particularly important aspect of the site evaluation is to examine the designation of the type of usability for the planned project (zoning). It is also important to consider how binding the specifications of the urban land use plan are and whether there are any deadlines for its validity. Types of Building Land The availability of building land is an essential basis for the realization of a project. The basic understanding in Germany, which is derived from Sec. 4 of the Valuation Ordinance (WertV), can also be applied conceptually to international projects. It distinguishes between • • • •

agriculture and forestry areas future development land undeveloped building land, and land ready for construction (building land).

Future development land is land which, according to its characteristics, other features, and location, can be expected to be used for construction in the foreseeable future. Undeveloped building land refers to the state of development of land with building rights whose development has not yet been secured, or land whose layout (location, shape, and size) still has to be parceled out through a reallocation or boundary regulation procedure in such a way that permissible development becomes possible. If land can be used for construction according to public law regulations, it is referred to as land ready for construction. Building land is generally defined as land on which buildings may be erected (building plots). Building rights can be used immediately after all building law requirements have been met (planning permission). The development must be secured. In this sense, the term building land is synonymous with land ready for construction. This distinction is important against the background of time availability. Depending on the project status, either already designated building land or undeveloped building land should be used. Only large-scale industrial projects, which in any case require special treatment in terms of planning and approval, should deal with questions of rezoning to building land, as these require time and complex approval processes. Building land is generally only available to a limited extent, as it must be designated separately by the authorities. Case study PR China: An extreme case here is the People’s Republic of China. The PRC Ministry of Land and Resources (see http://www.mlr.gov.cn/mlrenglish) annually sets a national budget for the designation of new building land. This budget is then allocated via so-called land utilization plans through the administrative hierarchy from the national level via the provinces to the administrative districts (districts, counties) and municipalities. The allocated budgets are very restrictive to maintain an appropriate balance between the need for building land on the one hand and the necessary agricultural land on the other, while at the same time there

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is a great scarcity of arable land. The background to this is the fact that only 14% of the total 9.6 million km2 of the entire territory of the PRC can actually be used for agriculture and 2.95% is designated as building land (information provided by the PRC Ministry of Land and Resources at: http://www.mlr.gov.cn/mlrenglish/about/facts, as of January 7, 2017).

As already explained, in addition to the urban land use planning designation, the degree of infrastructural development is the second essential criterion for classification as building land. The aspects of infrastructural development, its costs, and the apportionment of these are dealt with separately in Sect. 5.5.9. Approvability of Construction To erect a building or a structural facility and put it into operation, various approval procedures must be passed, depending on the type and scope as well as the location of the planned facility: • • • •

regional planning procedure urban land use planning procedure planning permission procedure operating permit procedure (in Germany comparable with permits according to the Federal Immission Control Act, BImSchG) • environmental approval procedure (environmental impact assessment). Notes: a) In Germany, the EIA is based on the Environmental Impact Assessment Act (UVPG). Here, the EIA is a dependent part of official procedures which have to decide on the permissibility of projects of a certain size, e.g., the construction of an industrial plant, an airport expansion, etc. b) In 1992, the European Union adopted Council Directive 92/43/EEC of May 21, 1992, on the conservation of natural habitats and of wild fauna and flora (the “Habitats Directive”). Together with the Wild Birds Directive, it aims to safeguard and protect wild species, their habitats, and the Europe-wide connectivity of these habitats (European network of protected areas “Natura 2000”). c) In 1979, the European Union adopted Directive 79/409/EEC (Wild Birds Directive). It regulates the protection of wild bird species and their habitats in the European Union. As a result, the EU Member States have committed, among other things, to the establishment of bird sanctuaries as an essential measure for the conservation, restoration, or creation of habitats for wild bird species. In the context of the site evaluation, the approval process applicable to the respective investment must be clarified in detail with the authorities. It should be noted that there are not only country-specific regulations, but also restrictions or exceptions for the granting of a permit at every level of the administrative hierarchy.

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Usability for Building Purposes The necessary plot size for a project results from the specifications of the urban land use planning for the area in question. The aim of these specifications is to fix a three-dimensional building window on the plot in question. This is why the respective regulations aim to define and thus usually restrict the following circumstances: • • • •

type of structures to be built efficiency of use of the land area maximum construction height minimum distances to neighboring properties.

Internationally, the type of structures to be built is usually classified in broad sub-areas such as residential, mixed-use, commercial, and industrial—a subdivision that is also followed by the German Land Utilization Ordinance (BauNVO). Equally comparable with the BauNVO is the regulation in many countries of the extent of structures allowed according to coverage index, floor area index, building density, or building height, with the following general calculation approaches: • coverage index:

FGRZ =

AB AG

(5.5)

Legend: FGRZ = floor index AG = plot area [m2] AB = built-up area [m2]. • floor area index:

FGFZ =

∑n

1 AF AG

(5.6)

Legend: FGFZ = floor index AG = plot area [m2] AF = usable area in the building per floor [m2]. n = number of floors • building density:

FBMZ =

VB AG

(5.7)

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5.5 Micro-Location Factors

Legend: FBMZ = building density AG = plot area [m2] VB = building volume [m3 enclosed space] These key figures are important because they can be used to set certain upper limits for the extent of construction allowed. By defining a three-dimensional building window (length, width, height), which is ensured by the application of these four key figures, the buildability of a plot of land can be comprehensively determined. Table 5.3 shows the specifications in Germany for industry and commerce (Sec. 17 BauNVO). In addition to the height of buildings (in Germany as eaves or ridge height, or as the number of full floors), there are also numerous other international urban land use planning indicators that have to be examined individually from country to country. Here is a selection of such indicators: • Greenery index The greenery index describes the minimum amount of green space to be provided in relation to the total plot area. Internationally, specifications in the range of 10 to 30 percent are common. • Recreation area index The recreational area index is a requirement, for example, in Japan, stipulating that for commercial properties of 10 ha, a certain proportion of the land must be set aside for recreational space. Often this part of the land is used as a baseball field for employees. • Minimum building density The specification of a minimum building density is, for example, a regulation in socalled land utilization plans in the People’s Republic of China, designed to achieve a minimum building density, and thus prevent land speculation in a country with a shortage of fertile land (Glatte, 2005, p. 159). This means that in addition to the classic upper building limits such as coverage index and floor index, there is also a lower building limit—albeit with different calculation modes. With the minimum building density, technical facilities (including, e.g., chemical reactors and piping systems) are also counted. With the coverage index, only buildings with load-bearing walls are counted, i.e., main buildings, administrative buildings, etc.

Table 5.3  Upper limits of the extent of construction allowed according to BauNVO

Type of building area

FGRZ

FGFZ

FBMZ

Commercial area (CA)

0.8

2.4

10.0

Industrial area (IA) Other special areas (OSA)

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The following example of the regulation of the degree of building use in the Shanghai Chemical Industry Park is intended to show how the differences are defined. The explanations are not detailed. In the absence of implementation regulations, there is thus a great deal of room for interpretation in implementation. The extent of construction allowed in the Shanghai Chemical Industry Park (Unified Design Stipulations for Shanghai Chemical Industry Park, July 2004): … The main indexes are as follows: Building Density of site area ≥ 35%, Coverage Index of site area ≤ 40%, Floor Area Ratio ≤ 1.0. The detailed design indices are in compliance with each project’s Land Use Planning and Location Suggestion Paper. The stipulations about the greenery ratio in SCIP’s Plant System Planning are as follows: the Greenery Ratio of site area is 12% for the industrial land within the Class III area, 25% for the industrial land within the Class I area, 20% for the industrial land within the Class II area, 25% to 30% for the municipal public facilities, 35% for the public facilities and 12% to 20% for the storage land…”

Even though there are conceptual parallels across states, there are numerous differences in detail. This applies in particular to the way in which the key figures are calculated, e.g., in which form walls, ceilings, basements, and attics are taken into account in the calculation, which measure applies to the structural height (ridge height, eaves height, full floors, and their calculation), etc. In an initial evaluation in the site analysis process, it is mostly possible to use the German indicators. In the detailed construction planning, however, an intensive examination of the local regulations is unavoidable.

5.5.9 Infrastructure Connections The availability of land designated as building land under planning law alone is not decisive for its usability from the perspective of a specific project. To guarantee usability, the degree of development is also important. This is the external connection of a site to the existing infrastructure. Schmidt-Eichstedt defines the term development as follows: “Development is understood to be the sum of the measures that are necessary in order to be able to use a plot of land for the first time in accordance with its intended purpose by means of building development” (Schmidt-Eichstedt, 1998, p. 277). There are several approaches underpinning this rather general conceptual explanation. Basically, a distinction can be made between development in the narrower sense and development in the broader sense (see Fig. 5.11). Development in the narrower sense includes, for example, public roads, paths, green spaces, and immission control facilities. When considering development in the broader sense, electricity, water, and gas connec-

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5.5 Micro-Location Factors

TECHNICAL INFRASTRUCTURE External development

Supra-local transport networks, power stations, wastewater treatment plants, …

Internal development (in the narrower / broader sense) In the narrower sense: streets, pathways, green areas, immission control facilities, …

External development (in the narrower / broader sense) In the broader sense: Internal development

power, gas, water, sewage connections, …

Property Mirco-location Macro-location Fig. 5.11   Overview of technical infrastructure terms

tions are also included. Development in the narrower and in the broader sense is also summarized as so-called internal development (Koll-Schretzenmayr, 2000, p. 43). This can be supplemented by the external development, which includes facilities that are responsible for supplying the area or settlement in question. Such facilities can also be located outside the considered microsite and include facilities such as local transport networks, sewage treatment plants, energy supply facilities, etc. Together, the external and internal development are also referred to as the technical infrastructure. If necessary, this can be supplemented by the social infrastructure such as schools and kindergartens (see Sect. 5.4.7). For industrial projects, especially large-scale projects, it is not only the availability of classic site development through electricity, water, sewage, and telecommunications from local—mostly municipal—providers that is relevant. Due to the sometimes extraordinary size of industrial sites (2 to 10,000 ha), a distinction must be made between external site development, i.e., development up to the site boundary, and internal site development, i.e., development within the site boundaries. In addition, the high con-

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sumption of large industrial plants requires a fundamental investigation of the infrastructure facilities for the region (see also Fig. 5.8). Especially in the case of large industrial settlements, it is important to set certain basic conditions for the settlement well in advance of the actual investment and to secure these contractually. In particular, it is important to convert early commitments by the respective development company, but also possibly by the competent authorities, into legally binding obligations and guarantees, and to fix them accordingly. This essentially involves the timely provision of land ready for construction and the existence of external infrastructure connections per se (road, rail, ship, electricity, steam, water, sewage, etc.). The form of such settlement agreements depends on the local site conditions and the requirements of the respective industry. However, these should be agreed during the conceptualization phase of an industrial project development. However, the technical details and commercial agreements of the infrastructural supply and disposal are usually agreed separately at a later stage in individual utility and site service contracts with the respective service provider or supplier (see Fig. 5.12). It is important to compare which costs are charged continuously as part of the service provided and which payment is to be made as a once-off payment, either as part of the

Project development phase

Type of agreement

Contents of agreement

Initiation Conception

Settlement agreement

General commitments such as - general framework conditions - incentives - availability at a specific point in time

To be concluded before the investment decision is taken

Concretization

Utility and site service contract

Detailed terms for each separate service regarding - technical supply conditions (specification, quanitites) - commercial supply conditions (prices, price development) - Legal supply conditions (liability rules)

To be concluded before project completion

Fig. 5.12   Comparison of settlement agreement and utility and site service contract

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land acquisition (comparable to the German model of development charges) or for the investment of the development. This will be dealt with separately in Sect. 5.5.13.

5.5.10 External Development (Supra-Local Infrastructure Facilities) Basics The consideration of external development focuses on infrastructure facilities that are of supra-local relevance, i.e., that go beyond the micro-location, but are nevertheless important for the investment project. Such an analysis refers to logistical facilities and facilities for the generation of electricity, steam, water, and the disposal of solids and wastewater. The existence of the facilities required for the investment itself will have to be examined, and a concrete enquiry made as to what existing and free capacities exist, as well as what expansion possibilities may exist for these facilities. Depending on the scale of the investment and the local structure (e.g., industrial parks), the analysis of infrastructure facilities can be conducted as a macro- or micro-location factor. For the sake of a uniform presentation, the analysis here takes place within the framework of the microlocation factors. Transport Facilities Sufficient logistical connections are one of the essential preconditions for industrial settlement. The existing regional and supra-regional transport network and its medium- and long-term expansion must be examined (Hack, 1999, p. 88). These are: • roads, highways, and expressways • sea or inland port facilities for containers, general cargo, bulk cargo, and liquids • railway networks and loading stations for containers, general cargo, bulk goods, and liquids, as well as • airports with local, national, and international connections for passenger and cargo transport. The analysis of the respective transport connections is also part of the logistics concept. In this context, considerations of the time availability of the products, their transportability and the transport costs play a major role. It can be roughly assumed that for very long transport distances the costs of sea freight are about one fifth of the costs of trucking. Similarly, air freight is about five times more expensive than road transport. This means that sea freight and air freight differ by a factor of about 25 (Abele, Kluge, & Näher, 2006, S. 301). Public Transport For employees in particular, the connection of an industrial location to a well-developed public transport system is a particularly important criterion for the attractiveness of the

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location. The purpose of this local public transport is the paid and commercial transport of people, whether in the form of a suburban railway, underground, bus, tram, or by other, locally customary means of transport. In developing and emerging countries in particular, attention must be paid to which means of transport are primarily used by potential employees. Often there are different expectations compared to western industrial nations—be it for reasons of prestige, acceptance, safety of the means of transport, or even just for cost reasons due to local income levels. In the absence of an established public transport infrastructure, the creation of a dedicated shuttle service may have to be considered. Storage Facilities In addition, the short-, medium-, and long-term availability and costs of diverse forms of storage facilities, as well as their protection against unauthorized access and the effects of weather, e.g., storms and flooding, must be examined, depending on requirements. It should be noted that warehouse processes include receiving goods, loading and unloading a means of transport, handling, transporting the goods within the logistics area, sorting, storing and retrieving, picking, and packing (Wiendahl, Reichardt, & Nyhuis, 2009, S. 195). These can be parking areas for containers and general cargo as well as areas for bulk goods. In these cases, the suitability of the floor (material, sufficient load-bearing capacity) must be clarified. Furthermore, possible storage facilities also include halls and tank farms. The availability and condition of these facilities must be determined according to a detailed needs assessment by the production and logistics experts. This also depends on the optimization of logistics processes in terms of professional transport management. The optimization of the routing of the goods to be transported, which must be carried out in this context, can significantly influence the warehouse structure and the transshipment points for the respective goods (see Sect. 5.4.1). In addition, however, the availability of open spaces for the production and assembly of the industrial plant must also be checked for the upcoming construction phase. Energy Supply Industrial settlement is mostly characterized by comparatively high energy consumption. This, as well as the increase in energy costs in general, requires a detailed examination of the existing energy generation facilities, i.e., power plants for electricity and steam generation, as well as the capacities of the power plants and their distribution networks. Due to rising awareness of environmental concerns, but also due to an increasing shortage of fossil fuels, local or regional authorities sometimes favor certain forms of energy production and consequently also promote them politically and through special incentives. This is particularly relevant for large industrial settlements that justify their own power generation or at least require a significant expansion of existing capacities. For example, for environmental reasons, no coal-fired power plant has been approved in

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Shanghai province for some years now; instead, the focus has been on the construction of natural gas-fired power plants. The consequence of this, however, is that electricity prices increase significantly due to the more expensive fuel. Conversely, this topic can also be interesting when using locally available fuels or alternative energy sources. In developing and emerging countries, the reliability of the energy supply is one of the main infrastructural problems. Occasional to frequent interruptions in the power supply may require industrial settlements to set up their own power supply. This can be done as a backup for power outages in the form of diesel generators as well as by installation of a completely independent power supply. With the latter solution, however, possible monopoly positions of local energy suppliers must be taken into account. The connection to the respective energy supplier is part of the site analysis, unless it can be assumed that the site will be self-supplied, e.g., by its own power plant. In addition to the connection strength of the relevant transformer station or transformer, the possible routing for the line connection is of particular interest. An above-ground routing is clearly less expensive, but requires corresponding space including safety distances. Underground routing, on the other hand, is much more elegant, but can entail about ten times the investment costs. To estimate the demand, there are a few ballpark values for the practitioner. In the chemical industry, for example, energy requirements are calculated in the order of 0.6 to 1.2 MW per hectare of built-up area of the industrial site. The operation of chemical reactors alone requires 1 to 2 kW per cubic meter of product. At the same time, a capacity of approx. 100 MW can be secured by connecting to a 32 kV substation. Water Supply A sufficient water supply is an oft-underestimated location factor, as its availability is essential not only for industries with high water consumption, e.g., power plants or the chemical industry for cooling water. But for these industries in particular, the existing water supply facilities are often inadequate. In addition to the water treatment plants (waterworks), their resources in the form of rivers, lakes, oceans, but also wells, if applicable, must be looked at with regard to their capacities and water qualities. In particular, availability cycles during the year, e.g., due to the effects of drought, must also be considered (Lampert & Woodley, 1991, S. 32). Sewage Disposal System In wastewater disposal systems, a distinction is made between direct dischargers and indirect dischargers (Rüffer & Karl-Heinz, 1991, p. 5). Direct dischargers discharge their wastewater directly into the receiving waters, while indirect dischargers first discharge it into a sewage treatment plant via a sewer system and then discharge the treated wastewater into public waters. The choice of system depends on the degree of pollution of the wastewater and is based on the respective local and, if applicable, internal company regulations.

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The consideration of the existing situation of the wastewater disposal system focuses primarily on the wastewater treatment plant, if any, that is available and intended for the planned industrial plant. In this case, it must be examined whether the existing systems can absorb the wastewater from the industrial production or whether pre-treatment within the plant’s own production process or even a separate wastewater treatment plant is required. It is also important to consider whether the planned industrial production involves manufacturing processes with a continuous wastewater load or a batch process. The latter only leads to the discharge of polluted wastewater at certain intervals (Rüffer & Karl-Heinz, 1991, S. 355). Communications Network Modern industrial production is inconceivable without connections to well-developed communication systems. These are not only traditional telephone lines but, increasingly, high-performance broadband cables and mobile telecommunications networks. But it also still concerns traditional forms of letter and parcel delivery—by the local post office or by courier service providers. SHE Facilities There are a large number of facilities that may be necessary and thus important for an industrial plant from the point of view of safety, health and environment (SHE). These must be examined in each individual case and checked for their relevance. Such facilities are usually the availability or efficiency of local security services such as the police and guard services. Against the background of the availability of efficient emergency management for industrial production, the proximity and competence of the responsible environmental monitoring center, fire brigade, and ambulance must also be examined. The main issues here are response times in the event of an emergency and the level of equipment as well as the available expertise in dealing with accidents in the planned production facility (Myhra, 2000, S. 29). Solid Waste Disposal Despite increasing optimization of industrial processes to minimize residues and waste, these can hardly be avoided altogether. Consequently, proper, and professional disposal is important, which can take place via landfills or residue incineration plants. In principle, at least one of the two options should be achievable at a reasonable cost. However, it should be ensured here that these disposal facilities are specified for the wastes and residues to be disposed of. A classic municipal landfill (household waste landfill) or municipal residue incinerator, for example, are in no way suitable for toxic industrial wastes (Kranert & Cord-Landwehr, 2010). Special waste landfills, special underground landfills, or special residue incineration plants must be sought out for this purpose (Sattler & Emberger, 1995, p. 147). It must be said here that there is a significant shortage of land available for landfills (McPherson, 1995, p. 91).

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It should be noted, however, that it is not only the existence of a disposal facility appropriate to the residual materials that is important. This must be accompanied by environmentally sound forms of collection, intermediate storage, and transport of waste and residual materials (Sattler & Emberger, 1995, p. 83 ff.). As a rule of thumb, disposal costs of approx. 400 to 500 EUR/t can be assumed for an external residue incineration plant, depending, of course, on the hazardous substances to be disposed of (as of 2014). Protective Facilities Against Natural Disasters Depending on any risks from natural disasters (see Sect. 5.4.9), the existence and condition of facilities for protection against such events may also need to be examined. A classic example of industrial production facilities, which are often built near rivers or seashores due to their large water demand, are dike facilities. Their dimensioning is based on the so-called design water level (Malcherek, 2010, p. 185). This is the highest water level to be expected within a given period. The time periods usually used for this evaluation are 100 or 200 years.

5.5.11 Inner Development Basics In contrast to the consideration of external development, which concentrates on supralocal infrastructure facilities, an evaluation of internal development focuses on the direct infrastructural connections of the site. This refers to the factors that constitute the development of a site from the point of view of transport, supply, and disposal, and thus ultimately enable the actual buildability of the site (Schmidt-Eichstedt, 1998, p. 277). It should be noted that the availability of the respective infrastructure near the property boundary is relevant for the internal development. Its availability directly at the property boundary is not necessary. However, it is important that a connection that is significant for the investment is available at least at such a distance from the property that it can be brought to the property with reasonable effort as part of the planned project. In this context, reasonableness is defined differently in each individual case as a function especially of the amount of the individual development costs in relation to the total investment costs. If some infrastructure is not yet available, the time of construction of the connection must be determined. In principle, however, the costs for the connection to the respective supply or transport network must be determined for all infrastructures. These costs can be offset in different ways and must therefore be examined individually for each infrastructure connection at each location alternative. On the one hand, it is possible that the respective industrial investor must develop their own site, either completely or partially. In this case, they also bear the costs through the investment. On the other hand, the site may already be fully developed. In this case, the development is either included in the price

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of the land or the investor participates in the development costs through a levy or fee (in Germany: development charges). In addition, direct agreements can also be made with site development companies or utility companies, especially for larger projects or separately developed areas. For example, the connection costs can be charged via the usage or service fees, even with longer periods of use of utilities. In addition, the one-off and ongoing costs, as well as the pricing and invoicing system, must be evaluated, especially in the case of supply and disposal services. The costs for the development itself are quite considerable, particularly in the industrial environment, and especially so in heavy industry. Here, the share of infrastructure in the total investment costs for new settlements is usually ≥ 20 percent. Further aspects—especially in technical terms—of the individual determinants of internal development are presented in detail below. Transport Links and Material Flow Every commercially used property depends on its transport connections. This ultimately defines its usability and thus not least its value. Large industrial sites, in particular, are all the more dependent on the availability and state of development of the most important transport links: • • • •

roads railways waterways (river/lake) pipelines/pipeline networks.

Ideally, all these connections are available. Whether they are really necessary, however, is always determined on a case-by-case basis by considering the goods to be transported as part of a logistics study. The latter should be carried out either as part of the site analysis or the utilization concept as part of the feasibility study (see Fig. 3.4). For large chemical complexes, for example, the rule of thumb is the “one-third mix”, i.e., 1/3 road transport, 1/3 rail transport, and 1/3 shipping transport as the distribution of externally arriving transport. However, there can be significant deviations from this depending on the location and the respective production. BASF SE, for example, reports that its site in Ludwigshafen, Germany, handles 30% of its traffic by rail and 40% by ship (BASF SE, 2017). The rest is usually done by truck. In contrast, the petrochemical complex of the joint venture between BASF and Sinopec in Nanjing was designed for a transport mix of 75% by ship, 15% by road, and 15% by rail in order to produce approximately 1.7 million tons of chemical products on its 220 ha site (Plasticker, 2005). Of course, it is not only the distribution of transport modes that is interesting for the planners and developers of such sites, but also the estimation of the possible absolute traffic flows. Here, the author’s site studies have proven approx. 30,000 t/ha per year for external material flows for large industrial complexes (especially in the chemical industry) to be a good guideline value. However, for internal material flows, i.e., handling

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within the plant perimeter, this guideline value can easily be increased by a factor of 3 to 4. Road Connection The most basic form of site development is the existence of an access road, i.e., the connection to a public road. This should correspond to the intended traffic of the site in terms of width, load-bearing capacity, and routing of the road. The construction phase should also be taken into account, i.e., the usability of the existing roads for construction machinery and heavy goods transport. The same applies to the access roads to the site during the construction phase, which should interfere as little as possible with the existing public traffic (Schach & Otto, 2007, p. 89). In the chemical industry, a traffic volume of 4 to 5 HGVs per hectare and day is calculated as a guideline for new settlements in large industrial plants. Railway Connection The need for a railway connection essentially depends on the logistics concept of the respective industrial project. Experience shows that there are only a few projects for which the lack of a railway track is an exclusion criterion in the choice of location (Hack, 1999, p. 86). However, its presence is often an advantage over other site alternatives, especially for the production of large quantities or the transport of hazardous materials. Boat Mooring The statements made on the railway connection can also be largely applied to the possibility of using ship transport. The development of appropriate jetties for the transshipment of containers, general cargo, bulk goods, and liquids as well as their temporary storage in appropriate facilities must be evaluated. The availability of a heavy-duty jetty for the construction phase can also be interesting. The comparatively unproblematic delivery of entire plants by ship enables a high degree of pre-assembly and can thus lead to a significant shortening of construction time and possibly also to reductions in construction costs. In principle, it can be said that the existence of several transport options widens the scope of logistical alternatives, which leads to a higher service level, improving the necessary delivery flexibility, and, thus, in the long term, increasing cost flexibility if required (Abele, Kluge, & Näher, 2006, p. 302). However, an essential aspect of this certainly advantageous situation is the extent to which the costs for the provision of flexible alternatives must be borne, even if they are not used. This must be examined separately.

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Power Supply There must be a sufficient supply of electricity. This is done by connecting the production site to the respective supply network at a substation or the nearest transformer station. In Western Europe, power plants feed a supra-regional 220 kV or 380 kV high-voltage grid. Substations then distribute the electricity to regional transport networks (110 kV) and supra-local distribution networks with medium voltage (10 kV, 36 kV—internationally also 30 to 60 kV). By means of transformer stations, this is in turn converted locally to the low voltage (230/400 V) used in the local grid to supply the low-voltage end customers. Depending on size and demand, industrial plants can be connected to 10 kV, 36 kV, 60 kV, or 110 kV substations. The guideline values for site planning in industry are demand figures for energy consumption of 0.6 to 1.2 MW per hectare of land area and the possibility of being able to cover a demand of approximately 100 MW of power with a 36 kV substation (author’s own empirical values). The stability of the supply network is particularly important in the case of power supply, as power failures can severely impair industrial production, especially in the case of continuous manufacturing processes, and can lead to enormous economic losses. For such production processes, a second supply line (double circuit system), or the provision of an emergency generator are useful (Lampert & Woodley, 1991, S. 32). Steam and Hot Water Supply Steam is needed for industrial processes and for district heating. District heating can also be ensured via hot water. Larger district heating networks are operated with hot water temperatures of 80° to 130° C and an operating pressure of 1.6 to 2.5 MPa (16 to 25 bar). Smaller district heating networks operate with lower supply temperatures of 80° to 90° C and lower operating pressures of 0.4 to 1.0 MPa (4 to 10 bar). With the help of a socalled compact station (transfer station), the heat is transferred to the consumer. Gas Connection The availability of a connection to a natural gas supply network is an essential location factor, especially in the industrial sector. However, the presence of a natural gas pipeline near the property boundary is not yet a location criterion. On the one hand, such a pipeline may be a high-pressure pipeline that is used for long-distance transport of natural gas and is therefore not suitable for a connection. On the other hand, it also requires the support of the responsible utility company to provide such a connection. Even in a natural gas-rich country like Russia, the provision of a connection can sometimes take years. As a guideline for industrial site planning, 1 m3 of natural gas can be used for 10 kWh of electrical energy. Note: In German process engineering and gas technology, 1 m3 of natural gas or town gas is usually designated as 1 Nm3 (standard cubic meter).

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Water Connection With regard to water supply, several aspects have to be considered. There are different water qualities, such as drinking water, which is subject to special requirements, but also the qualitatively less demanding process water (industrial water). In addition, there are special water qualities in the industrial sector such as demineralized water. Furthermore, greatly varying volumes are required depending on the manufacturing needs. This applies in particular to industries with cooling water requirements, which can result in an extraordinarily high water demand. Also, different pressures will be required for the water supply for the different uses of the water—sanitary facilities, production area, fire extinguishing water system (Mutschmann & Stimmelmayr, 2011, p. 38 ff.). Demand is mostly met from existing municipal pipeline systems. Special solutions for large-scale consumers also include direct abstraction from rivers, lakes, or oceans, as well as from well systems (Lampert & Woodley, 1991, p. 32). It should be noted that such withdrawals are usually subject to authorization and fees. Sewerage and Drainage The design of the sewage system of a new production site depends on the expected wastewater on the one hand and on the existing sewage system on the other. Wastewater from an industrial site can be roughly divided according to its origin into: • • • • •

cooling waters precipitation water from roofs and streets precipitation water from production and storage areas sanitary wastewater, and process wastewater.

Cooling water represents the largest amount of wastewater, especially in large-scale industry. Since it does not contain any pollution, it can be discharged directly into the receiving water via a separate sewer system. The same applies to precipitation water from roofs and traffic routes outside production facilities. However, wastewater from areas of production, but also logistics (storage of products, handling, filling stations, etc.) can be contaminated by handled products. This can be due to, for example, leaks in plant components, carelessness when handling products, or cleaning work. Such wastewater, like sanitary wastewater and process wastewater, is fed into the sewage treatment plant. On the wastewater discharge side, a distinction is made between different drainage systems (Hosang & Bischof, 1998, S. 76): • • • • •

combined sewer system modified combined sewer system separate sewer systems extended separate sewer systems special systems.

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In the case of combined sewerage, sanitary, process, and precipitation wastewater are discharged together. In the modified form, this only concerns contaminated wastewater and precipitation wastewater requiring treatment, while precipitation wastewater not requiring treatment is allowed to seep away on site or discharged into a receiving watercourse. In the case of separate sewer systems, wastewater and rainwater are each discharged in separate sewers (Hosang & Bischof, 1998, p. 76). Since rainwater usually has a very low pollutant load, it is usually discharged directly into receiving waters or allowed to seep away, rather than being treated in wastewater treatment plants. Extended separate sewer systems discharge wastewater and rainwater requiring treatment in separate sewers. Precipitation wastewater not requiring treatment is allowed to seep away on site or discharged into a receiving watercourse. In addition, there are various special methods. One solution found in industry, especially in remote regions, is that of a drainless collecting pit. In the case of low wastewater volumes and corresponding wastewater quality, this variant of temporary storage and occasional disposal by vehicles is still a common and very pragmatic approach. Telecommunications Connection The development of the site by means of modern telecommunication cables as well as the availability of mobile means of communication is virtually a fundamental prerequisite for an industrial location today, and in most industrialized and emerging countries it no longer poses a problem (Lampert & Woodley, 1991, p. 33). However, it is important to consider the availability of telecommunications not only at the time of commissioning of the production facility to be built, but also during the construction phase. Raw Material and Product Piping Systems The chemical industry in particular likes to transport raw materials and products via pipelines. These offer greater transport safety and enable local, but also supra-regional networking of manufacturing processes. The latter also enables greater flexibility in the procurement of raw materials and in the planning of plant inspections or major maintenance. The connection to such a service system can therefore represent a clear location advantage. Pipeline Routes The internal infrastructure distribution looks at the development within the site in question (see Fig. 5.8). Industrial sites are often characterized by an extraordinary size. Even if it is not usual for parts of new sites to be already developed internally, such existing infrastructure development can prove to be a major cost advantage. Such a situation is often found in existing industrial sites, which market existing open spaces or formerly used parts of the site for industrial settlements (Koll-Schretzenmayr, 2000, p. 43). How-

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ever, these sites have other disadvantages, e.g., contamination. These would have to be weighed against the advantages in terms of infrastructure costs.

5.5.12 Internal Infrastructure Distribution The internal infrastructure distribution looks at the development within the site in question (see Fig. 5.8). Industrial sites are often characterized by an extraordinary size. Even if it is not usual for parts of new sites to be already developed internally, such existing infrastructure development can prove to be a major cost advantage. Such a situation is often found in existing industrial sites, which market existing open spaces or formerly used parts of the site for industrial settlements (Koll-Schretzenmayr, 2000, p. 43). However, these sites have other disadvantages, e.g., contamination. These would have to be weighed against the advantages in terms of infrastructure costs.

5.5.13 Economic Aspects of a Property Every new location requires investments in the internal and external development of the site, including its planning and financing, as well as, if necessary, the expansion of surrounding, further infrastructures (e.g., storage, handling facilities, flood protection, etc.). These investments are only possible if all stakeholders of the project, e.g., the previous landowners, the authorities, the banks, and the interested investors are aware of the costs involved (Kyrein, 1997, p. 145 ff.). Transparency can be created by means of a project calculation with realistic assumptions regarding the price of the land, the type and extent of building use, and the construction and financing costs. In principle, it can be said that industrial production facilities are usually realized on their own property. Against this background, the land market for industrial properties is of particular importance, while the market for commercial rental properties with industrial use has so far only been of very secondary relevance (Schulte & Bone-Winkel, 2002, p. 179). Like any other freely functioning market, the land market is defined by supply and demand. Industrial land has the advantage of being located in peripheral locations or away from urban settlements. This tends to indicate low land prices. This assumption is true for regions with falling or stagnating economic power. In a dynamically growing economic environment, however, a shortage of industrial land is often to be expected, which is then reflected in higher prices according to market laws. In the context of a site evaluation for an industrial project, land in a wide variety of conditions and locations must be compared. This does not make comparability for an assessment easy. Capozza and Helsley investigated this issue and in 1989 published a model (see Fig. 5.13) on this subject (Capozza & Helsley, 1989, S. 300). Four additive components are assumed for the land price:

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Property value per m²

W

Legend: D = distance from town center DB = boundary of settlement DG = boundary of municipality Favorability of location and development Cost of development

Expected future increase in value

Value for agricultural use Area inside the settlement

DB

Area outside the settlement

DG

D

Fig. 5.13   Capozza and Helsley model (schematic)

1. the land price for agricultural use without expectation of building use 2. the value resulting from the development and location favorability of the property as a function of its distance to the town center 3. the costs of the (infrastructural) development of the property 4. the (expected future) increase in value of the land as a result of settlement expansion. Where the land is not yet developed (undeveloped building land), point (3) is not to be taken into account in terms of value. It is interesting to note in the practical application of this model that the land price increasingly approaches the price of arable land as the distance from urban areas rises (DP