REAL ESTATE ASSET MANAGEMENT
Active Real
Estate Asset Management
Producing Operational Alpha
Brano Glumac, Lecturer in Real Estate / Real Estate Finance
Active Real Estate Asset Management
Aims
1
Producing operational alpha?
2
Main topics
Section 1
Context, definitions, benefits
The Context of Active REAM
Different than other asset classes
•
•
•
•
Unlike securities (bonds and shares), real estate is a major asset
class that needs operational management.
Most investors are focussed on maximising risk adjusted income
and capital returns and are benchmarked accordingly.
Property and asset management involves numerous recurring and
non-recurring procedures and activities. Many are
contractual. Some are statutory requirements. Others are
discretionary.
The intensity of operational management required or possible is
mainly a function of age of building, use of building, building
construction, tenant quality and quantity, lease terms and
structures and market conditions.
Real estate operational management
responsibilities and decisions (albeit many are
taken jointly) tend to be split between:
•
•
•
•
•
•
Owner
Fund manager
Asset manager
Property manager
Facility / building manager
Specialist subcontractors (cleaning, security etc.) and other third
party service providers (legal, accountancy etc.)
4
The Context of Active REAM
Different within REAM organizations
• It’s possible that all of the above may work for different
businesses. Many of these functions are often outsourced.
• Real estate management organisations may configure
themselves in different ways - by sector, function, geography,
client or fund?
• The occupier (and their real estate managers) is at the other
side of these investor asset and property management activities
5
What is an active REAM?
Historically, in the UK it is believed that the interaction
of long leases and the dominance of institutional
ownership created a culture of passive management.
Tenants responsible.
What can the asset manager do to add value,
improve returns and/or reduce risk? What can the
property manager do? What can real estate asset
managers do to have positive impacts on the cash
flows from the asset?
Isn’t everyone
an active real
estate asset
manager?
Not really a binary division
Recurring words: Positive – Active – (Entrepreneurial?)
Shift to shorter leases, regular benchmarking and
performance measurement and more diverse
ownership patterns have transformed this culture.
6
What is an active REAM?
A significant asset class that needs to be managed.
…..Creating costs, risks and potential opportunities.
Many funds specialise in buying assets that they
perceived are ‘under’ managed and attempt to
‘reposition’ them.
In many (but not all) assets, there can be numerous
‘transactions’ taking place with suppliers, clients and
tenants.
Real estate
investment
can be a
management
‘play’
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The portfolio / fund management
Fund Management
OPERATING
STRATEGY AND
MODEL
The property and facility management
Property
and
Facility
Management
TENANT
SATISFACTION
IDENTIFICATION
AND EXECUTION
OF VALUE AND
OPPORTUNITIES
The asset management
Asset
Management
CAPACITY TO
IDENTIFY AND
EXECUTE
VALUE ADD
OPPORTUNITIES
Active real estate asset management
Definition
An improvement in asset or location quality can be
achieved through refurbishment, redevelopment or
‘place making’ and an increase in the security of
income can be achieved through lettings, lease
re-gears or the removal of breaks.
Goshawk/IPD report
11
Active real estate asset management
Definition
An approach to real estate asset management that, in addition to either
contractually or statutorily required real estate management tasks,
emphasises discretionary interventions by the real estate asset manager
with the aim of improving assets’ risk-adjusted performance. Among
other actions, active real estate asset management may involve modifying
real estate assets’ legal, physical, use, financial, and occupational
structures and attributes
Prof. Pat McAllistert
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Active real estate fund management
Portfolio (Fund) MSCI Risk Web
See Blundell et al. (2005) or Blundell et al. (2011) for discussion
It’s not just capital value. Portfolio risk
variables may be important. How can
they be improved?
13
Active real estate fund management
Warning
How to create an Alpha?
•
http://www.nreionline.com/blog/creating-commercial-realestate-alpha
Strategic and tactical portfolio
management
•
Change the multi-asset portfolio weightings
•
Change the real estate portfolio weightings
Easy to say but harder to
accomplish
What is the opposite of active
fund management in this
context?
Stock selection
•
Identify and sell assets expected to underperform
•
Identify and buy assets expected to outperform
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Section 2
Operational alpha in projects
Active Real Estate Asset Management
Aims
1
Producing operational alpha?
2
Main topic
Research
Professor Colin Lizieri, University of Cambridge et. al.
See report:
Link:
https://www.ipf.org.uk/resourceLibrary/an-investigation-of-hurdle
An Investigation of Hurdle Rates in the Real Estate Investment
Process
-rates-in-the-real-estate-investment-process--may-2017-full-report.html
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Three types of investment projects
Active real estate asset management
Core - investment
Effectively three type of
investment projects are:
Value-added or opportunistic
Strategic interactions
18
Three types of investment projects
Active real estate asset management
In the first, the investment manager is confronted with
a project that has exogenous cashflows that cannot
be altered by the manager in the future. In real
estate, such a project would include some of what are
called ‘core’ investments and would correspond to a
fully rented building with long-term rental contracts.
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Three types of investment projects
Active real estate asset management
In the second type of investment project, future cashflows can be
altered by the manager. In real estate, such types of project would
include those that are called value-added or opportunistic,
depending on the degree of flexibility that the project brings. A
building with vacancies that can be filled or that has rental
contracts that can be adjusted in the future would also be such a
project. Another example would be a piece of land that the owner
could develop in the future.
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Three types of investment projects
Active real estate asset management
In the third type of project, strategic interactions
between market participants play an important
role. For instance, two developers might be
interested in opening a new shopping centre, but
only the first will be profitable.
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Risks
Active real estate asset management
Asset risk and active asset
management opportunities tend
to be positively related.
Low risk (core) assets tend to
have little potential to add value
by active asset management. For
example:
•
New warehouse let to Sainsbury’s on 25 year FRI lease at
index-linked rent with high site coverage in an oversupplied
market.
•
Newly constructed office pre-let to ‘blue chip’ tenants.
Higher risk assets tend to have
potential to add value. For
example:
•
Obsolete industrial unit with imminent lease expiry near
upmarket residential area.
•
Poorly performing tenants in thriving shopping centre.
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Risks
Active real estate asset management
Vulture
Opportunistic
Return
Value Added
A common classification of
investment segments. There
is usually more potential to
add value through active
management to higher risk
assets.
Core Plus
Core
Risk
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Section 3
Stages and opportunities
Asset management interventions
Active real estate asset management
There tends to
be different
types of asset
management
interventions
required or
possible at
different
stages in the
asset life cycle.
Figure 2.10 – Life cycle cost graph
Riley, M. and Cotgrave, A. (2003), Construction Technology 2: Industrial and Commercial Building, Palgrave Macmillan, Basingstoke, p.59.
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Asset life cycle progression – key emphases
Active real estate asset management
Stage 1
Set-up
Snagging, fitting
out, marketing,
letting, services
procurement and
contract
negotiation.
Stage 2
Stabilised
Rent collection, rent
reviews,
maintenance,
repairs, alterations,
tenant
compliance/failure,
assignments,
sublets, lease
renewals, lease
re-gears.
Stage 3
Strengthen
Repeat
Expiries, surrenders
and dilapidations,
lettings lease
renewals, upgrades,
refurbishment,
demolition,
redevelopment,
replacement,
design,
construction,
marketing.
Active management opportunities tend to change over time
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Adding value to asset mix
Active real estate asset management
Adding Value?
‘Straw-asset’ 1 | Low Beta |
Core
‘Straw-asset’ 2 | High Beta |
Value add
Improve tenant mix? Surrender
premiums?
Single tenant
Multiple tenants
Is the scope for re-gearing
leases?
Long unexpired lease term
Short unexpired lease terms
Can onerous lease terms be
changed?
No onerous lease terms
Onerous lease terms
Can the quality of tenants be
improved?
High tenant credit risk
Low tenant credit risk
Can a building be improved?
High quality building
Low quality building
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Adding value to asset mix
Active real estate asset management
Adding Value?
‘Straw-asset’ 1 | Low Beta |
Core
‘Straw-asset’ 2 | High Beta |
Value add
Is there scope for increasing
quantity of space?
Site at maximum development
density
Site at low development density
Is there scope for changing the
use of space?
Site at highest and best use
Alternative uses are viable
Can the layout be improved?
Configuration of building is
inflexible
Configuration of building is flexible
Does the L have control?
FRI lease
Landlord responsible for repairs
etc
Can the L affect the service
charges?
No service charge
Many services delivered by L
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Adding value to asset mix
Active real estate asset management
Adding Value?
‘Straw-asset’ 1 | Low Beta |
Core
‘Straw-asset’ 2 | High Beta |
Value add
Is there scope for additional
revenues from advertising?
Public has no access to building
Public are commonly on the
premises
Is there demand for new space
or uses?
Static or declining local
economy/property market
Dynamic local economy/property
market
Optionality
Low
High
Entrepreneurship
Few opportunities for
entrepreneurial asset
management
Numerous opportunities for
entrepreneurial asset
management
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Section 4
Intervetions
Active Real Estate Asset Management
Aims
1
Producing operational alpha?
2
Main topic
Discretionary interventions
Active real estate asset management
Asset managers can improve:
•
the portfolio
•
the asset
•
the tenant
•
the lease
•
the title
•
the use
•
the service offer
•
the financing
Sometimes triggered by lease
events? For example, alterations,
assignments, sublets,
improvements, breaks, deeds of
variation, lease expiries, lettings
etc.
Lease events create a
requirement and/or an
opportunity to improve the asset,
tenant etc.
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Change the building?
Active real estate asset management
Invest capital to improve the
building (modernise and upgrade
building infrastructure and
services, update appearance etc.)
in order to
•
Increase marketability (attract and/or retain tenants)
•
Reduce the service charge (e.g. introduce energy efficient
technologies)
•
Increase rental income
•
Increase capital value
Invest capital to replace the
building
•
Realise development profit
•
Increase capital values
What knowledge and skill is
needed here?
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Change the building?
Active real estate asset management
Invest capital to extend the
building by increasing density
and adding more lettable space
e.g.
Invest capital to reconfigure the
building
•
Surplus land
•
Add extra stories (air rights)
•
Mezzanine floor
•
Sub-divide space
•
Increase Net Lettable Area (NLA) by reducing common
space
What knowledge and skill is
needed here?
34
Change the tenant
Active real estate asset management
Improve the quality of the
tenant base
•
Change tenant mix (in shopping centres)
•
Replace weak credit ratings with strong credit ratings
•
Change tenant location
What knowledge and skill is
needed here?
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Change the lease
Active real estate asset management
Improve the quality of the lease
•
Lease re-gearing – surrender short lease and replace with
long lease
•
Surrender premiums
•
Changing onerous lease terms
What knowledge and skill is
needed here?
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Change the title
Active real estate asset management
Leasehold (negotiate freehold?)
Planning (change?)
Easements (remove?)
Rights of light (identify?)
Restrictive covenants (remove?)
Air rights (identify?)
Rights of way (remove?)
Other
Wayleaves (remove?)
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Change the use
Active real estate asset management
Shift to highest and best (highest value use) use
•
UK in the last decade – office to residential
•
In the next decade – retail to … Residential? Logistics? Leisure?
An example
•
Industrial or Office to Residential?
•
https://www.sciencedirect.com/science/article/pii/S2210670720306004
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Change the financing
Active real estate asset management
Create value by re-financing
Change gearing
Restructure existing loans
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Change the products and services?
Active real estate asset management
Property related
Business-related
•
Facilities management
•
Utilities (JVC example)
•
Fit out
•
E-Procurement of goods and services
•
Relocation
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Change to provide...
Business services
Business accommodation
Office infrastructure
Facilities management
services
Change to provide...
Commercialisation
Concessions and kiosks
Digital advertising and
marketing
Promotions and corporate
partnerships
Events 'pop-ups'
Entertainment and play
Vulture
Often complex and high risk
insolvency situations
Assets tend to have complex
problems such as:
Vulture funds tend to emerge
when market conditions are very
poor
Barriers
Active real estate asset management
Lack of information and knowledge
due to supply chain fragmentation in
real estate management (outsourcing)?
Lack of entrepreneurial culture?
Failure to attract entrepreneurial
personnel to large financial institutions.
Lack of resources? Pressure to keep
headcount low
Lease contractual constraints? Can
restrict the ability of the asset manager
to
Lack of asset management focus?
Pressure or a preference to focus on
large transactions and
acquisitions/disposals.
make value adding changes
Opportunities? Some assets offer more
opportunities to add value than others
https://getrealpat.wordpress.com/2015/06/10/how-do-they-maange/
Lack of incentives? For PMs to identify
opportunities?
https://getrealpat.wordpress.com/2018/01/04/real-active-assetmanagement-options/
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Future Challenges
Are there likely to be
significant numbers of
unexploited asset
management
opportunities to
add value being missed?
Does entrepreneurial
activity in asset
management
get appropriately
rewarded? Are the
incentives right?
FAQs
Does property and/or
asset management
attract entrepreneurs?
Intraprenurship
New normal?
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Summary
Property and asset management
affects returns, risks and
performance.
Active management
opportunities vary with assets.
Asset management opportunities
and risk tend to be positively
related.
Key variables are lease structures,
tenant quantity and quality,
services required, market
conditions, building type,
building age, density of
development, building use etc.
Organisational cultures and
incentives are likely to influence
the extent to which latent
opportunities are exploited.
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