Capital Investment Strategy vs. Capital Planning

Capital Planning Real Estate Building

If you ask most property executives about their capital investment strategy, many would quote the amount of money they expect to spend over the next 12 months on their buildings. Although that amount is important, the figure itself has more to do with budgeting than it does strategy.

Capital planning focuses on the lifecycle of individual assets and when they’ll need to be replaced. A capital investment strategy is a longer-term, bigger picture approach that looks at all assets and how investing in them reflects and helps meet your business goals.

It is a fairly common trend for organizations to confuse capital planning with capital investment strategy. Capital planning focuses on the lifecycle of an asset and the raw maintenance costs needed to keep it running. For example, say the HVAC system in one of your buildings needs updating next year, so you set aside a budget for it.

A capital investment strategy is a long-term roadmap aligning capital expenditures with larger business, portfolio and financial objectives. Using the same example, you might update that same HVAC system six months earlier than planned to get the systems in several of your buildings updated at the same time and take advantage of bulk pricing. Or, you might opt to delay the update to set aside further capital for a greener system that would help prepare the building for LEED certification.

A true capital investment strategy can seem elusive. Plans evolve and new data changes your thinking. External events can change your tactics… so how do you stay on course when you feel like organizational targets seem to move on a daily basis?

Aligning short-term interests with long-term objectives is not an easy thing to do. We suggest four approaches to make it happen.

Define Your Needs, Wants and Objectives

For example, many organizations are implementing smart building technologies into their existing assets, making technological adoption a key business priority. Organizations need to ensure their funding and investments align with their capital priorities.

Historically, the capital planning process has focused on the lifecycle of an asset—its condition and the cost to replace it. The resulting problem is a situation like this: an organization needs to do a $10 million improvement but has $2 million available, and no way to deploy it effectively.

Build a Roadmap

One capital investment strategy is to build a capital program—often over multiple years—that takes into account the full cost of an improvement. A $10 million investment over 10 years is a lot easier to visualize than $2 million over one year.

Organizations with multiple buildings should take a portfolio-level approach to their capital investment strategy. Which buildings need immediate capital? Which investments create the most ROI for the portfolio? How can capital be distributed over time and between multiple buildings?

Read more: How to strategically deploy capital across your real estate portfolio.

Take a Portfolio-Level Approach

Organizations typically look at their capital budgets amongst their buildings as a competitive process, where buildings fight for limited funds. A better approach is taking a macro-approach to capital planning.

Organizations looking to implement a better capital investment strategy need to build better KPIs with their information. Most groups tend to focus on performance-based capital indicators such as cost and budgeting. But what about setting targets for meeting certain business objectives? For example, if your organization is focused on meeting certain green building targets, your capital KPIs should be aligned accordingly.

Read more: How to create a successful capital investment strategy.

Build Strategy-Focused KPIs

Many organizations attempt to make multi-million dollar decisions with inadequate data. One of the first things we tell our clients is to take a step back and truly understand the data that their buildings and components produce. Organizations with complete, up-to-date and accessible data on their assets are better equipped to make good decisions with their capital investments.We advocate for the use of advanced software and sensor technologies to understand the physical state of buildings and infrastructure—our host of software products is a good place to start.

Read more: How to determine the right KPIs for your portfolio properties.

Maintain Better Information

Contact us to see how our software can contribute to your capital planning strategy.

Photo credit: dies-irae / Shutterstock, Inc.

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