Divisional performance measurement
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The document analyzes the divisional performance of three real estate companies in the GCC—Emaar Properties, Aldar Properties, and Ezdan Real Estate—using financial metrics including ROI, RI, and EVA. Emaar demonstrates the best performance, followed by Aldar, while Ezdan shows potential for improvement. It highlights that EVA is the most effective measure, aligning management incentives with corporate goals, although non-financial performance measures also need to be considered.
Divisional performance measurement
- 1. DIVISIONAL PERFORMANCE MEASUREMENT ON EMAAR PROPERTIES ALDAR PROPERTIES EZDAN REAL ESTATE CO. By EMAAR BY GROUP 5
- 2. We chose three real estate companies of GCC, Aldar Properties Emaar Properties Ezdan Holdings and analyzed their financial statements of the previous eight years for a divisional performance measure. We chose these companies because: 1. Real Estate companies re-invest their earnings and do not retain them. 2. They seek capital gains rather than passive cash flows. 3. Real Estate have more transactions of investments than the others and investment is a big criterion for divisional performance measurement.
- 3. •Established in 1997, is one of the worlds most valuable real estate development companies. •Listed on the Dubai Financial Market. •Emaar’s level of project development skills are highlighted by its iconic assets in Dubai like Burj Khalifa, The Dubai Mall and the fountain associated along with Downtown Dubai. •Standard & Poor gave a BBB- credit rating to the company because Emaar properties have maintained a consistent performance.
- 4. •Based in Abu Dhabi •Benefits worth Us$ 12 billion. •Aldar Properties is a strong partner of the Abu Dhabi government, which is a major shareholder. •Created some of Abu Dhabi's most famous and complex ventures like Formula 1 offices on Yas Island, Shams Abu Dhabi group on Reem Island, etc.
- 5. •Ezdan is the largest real estate company of Qatar established in 1993. •Listed on the Qatar Exchange •Manages about 14,500 housing units mainly in Al Wakra an Al Wukair •Owns more than 18,300 diverse real estate units in Doha. •53% of the total revenue of Ezdan holding is through rental revenue through Ezdan Real Estate
- 6. • Divisional Income: Division revenues minus division costs •Each company’s real estate revenue was considered and costs pertaining to real estate was subtracted from it so as to obtain the divisional income. •Just like investors use accounting income to assess a firm's performance, firms use a division’s income to assess divisional performance. •But divisional income is not the best measure for a divisional performance of a company because it doesn’t consider on the investment made on that particular segment of the company and uses only the operating income of that segment which causes a narrow focus.
- 7. • Return on Investment (ROI): Ratio of profits to investment in the asset that generates those profits ROI = Divisional income ÷ Divisional assets • ROI as a performance measure is better than divisional income because it provides a comparison of different size divisions. • But if a divisional manager’s performance is evaluated based on ROI, then their incentives will not be aligned with a corporate goal.
- 8. RETURN ON INVESTMENT 2006 2007 2008 2009 2010 2011 2012 2013 ALDAR 79.5 58.3 66.9 13 -150 10.7 22 18.5 EMAAR 46 40 18.4 8.9 7.4 5.1 5.5 9.7 EZDAN 59 10.9 28.6 100 0.3 1.1 0.8 3.1
- 9. -200 -150 -100 -50 0 50 100 150 2006 2007 2008 2009 2010 2011 2012 2013 ALDAR EMAAR EZDAN • ROI of Emaar is low because gains are low and should be increased. •ROI of Ezdan: First low, 2007- sharp cut in rental revenue. Peak in 2009- overall increase in divisional income Bottom in 2010 – large amounts of investments. •ROI of Aldar has been high-low- stable. •Went negative in 2010 because costs and expenses were way too high.
- 10. •Residual Income (RI): This is the excess of actual profit over the cost of invested capital in the unit. RI = NOPAT – Capital charge (capital charge = weighted average cost of capital * average invested capital) •One way of calculating economic profit is by calculating economic value added Economic Value Added EVA = adjusted NOPAT – Capital charge ROI and RI are short term concepts which deal only with the current reporting period whereas managerial performance measures should focus on future results that can be expected because of present actions.
- 11. EVA 2006 2007 2008 2009 2010 2011 2012 2013 ALDAR -290224 253462 1451024 -960454 5812112040641 3255022 826281 EMAAR 3837448 3846706 24424921404702 17703111603178 1606329 2365321 EZDAN -106771 -300255 -309219 136508 31477 307278 154706 908617
- 12. -2000000 -1000000 0 1000000 2000000 3000000 4000000 5000000 2006 2007 2008 2009 2010 2011 2012 2013 ALDAR EMAAR EZDAN •EVA has fluctuations mainly because of changes in profits •With the help of EVA, we can easily compare the divisional performance of each company • Emaar has the best performance in these three. •Although Aldar has a very unstable performance, it stands second •Ezdan’s performance is not at that great but there are great chances of improvement.
- 13. In the divisional performance measurement of Emaar, Aldar and Ezdan Properties, we analyzed the various financial performance measures like ROI, RI and EVA. EVA is the best performance measure as it gives the managers an incentive to invest only in those projects which earn more than the cost of capital unlike ROI. Thus, the corporate goal of performance is fulfilled through EVA. Therefore, Divisional Performance-wise, Emaar is the best of three. However, there are also other non-financial divisional performance measures like competitiveness, product leadership, productivity, quality, innovation and flexibility which can evaluate a company on its performance.
Editor's Notes
- #10: hit its first low in 2007 due to a sharp cut in rental revenue, it touched its peak in 2009 due to a huge increase in the divisional income but then it hit bottom level in 2010 due to large construction projects and investments made.