Thursday, September 30, 2010

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industry investment and integration of new technologies will continue to increase but will be limited due to current capital market conditions. Some REITs are investing in software and hardware to gain access to new markets and help in understanding their operations and bottom line. They are using technology to control costs through better inventory management system and improve oversight of portfolio assets. The majority of REITs are working with obsolete and nonintegrated systems. In the past, REITs have not emphasized information technology or management systems (PriceWaterhouseCoopers).

The Impact of Management Information Systems

Systems integration will be the main focus for REITs over the new three years. Most companies use disparate property management, accounting and tax systems, requiring costly maintenance, support and backup. There are huge cost savings associated with increased financial and operating control and integration. The ability to access multiple databases and systems will provide management with tools to recognized changing affects on net operating income, and plan property and portfolio level strategies. The merger and acquisitions between traditional REITs, or technology firms, will necessitate better technology integration. Systems and technology integration account for 50% to 75% if total merger costs. Existing information system departments are ill equipped financially and technically to handle systems integration, and may need to reduce or eliminate current IT staff, or go to outside consultants to make the transition. REITs are using new technologies (LAN/WAN/Intranet/Extranet) to understand their competitive positions in the industry and the competitive position of their assets in the real estate market. The availability of detailed leasing information, including lease roll over, heightens the competition for tenants. REITs that can afford to invest in technological innovations are expected to outperform others in the industry. Sophisticated internal financial and operations reporting systems can be combined to assess the portfolio and individual asset performance, increasing the value of the stock price in the process. Because REITs are capital constrained, they may be able to upgrade their building maintenance and reporting systems if tenants help finance it. REITs have a depreciation tax advantage when making capital investments, an advantage the tenant does not have. By signing long-term leases with tenants, REITs can capitalize investments in technological infrastructure. This will allow REITs to raise funds in the public and private capital markets for technology improvements, and allow tenants to depreciate the increased charges as rental expenses, maximizing net operating income for the REIT and reducing tax burdens for the tenant. The Impact of the Internet The Internet will significantly affect retail, hotel, warehouse and distribution, office and apartment REITs. Industrial REITs with tenants in warehouse and distribution facilities will be distributing higher levels of consumer goods: books, jewelry, and electronics; while retail REITs in power center facilities will be selling lower levels of consumer goods. Higher demand for industrial space will provide REITs with revenue growth opportunities through rental increases, expansion and rehabilitation, and new construction. Lower demand for power center space will lower REIT revenue growth through falling occupancies and rents. Well-located regional malls will faced less competition. Successful retail operations will embrace Internet technology, using it to enhance physical space amenities. Office REITs are working to provide high-speed Internet and e-commerce infrastructure to its tenants; and residential REITs are working to provide high-speed Internet access to its residents. The introduction, integration and implementation of the Internet and e-commerce into the REIT business model are completely new for the real estate industry. Most REITs are at least four years behind the Internet and e-commerce technology market. For REITs to make the transition to the new economy, a new business model must be developed. Business models that develop and implement new strategies rapidly and effectively enhances competitiveness and profitability. There must be clear lines of communication between the functional lines, the technology component and the marketplace. As the Internet is integrated into business operations, greater efficiencies and productivity will be achieved. Developing real-time internal control systems via the Internet will allow for quick identification of unnecessary expenses or taxes, and allow for faster management response times. In the future, REITs will need to reshape their business models to align themselves with the market. The quicker a REIT can integrate new technologies into their operations, the more competitive and profitable they will become.

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