Five key value drivers for real estate owners

As the world continues to deal with challenging market conditions, real estate owners need to get creative when it comes to keeping their properties relevant.

A post-pandemic paradigm shift has taken place in the macro economy, and the real estate sector has endured its fair share of upheaval. The growth of hybrid working is seeing owners and operators increasingly embrace mixed-use properties, while the rise of e-commerce is also pushing them to find ways to make retail a more attractive asset.

The challenge is not only in how to improve an asset but also how to do so while generating strong returns. To further compound the issue, there are rising debt costs and the pressure to be ESG-compliant.

As the sector looks to create value in a time of change, here are five key trends set to dominate.

1 Repurposing existing assets

Retail is a sector in need of transformation – the pandemic accelerated the move to online shopping, causing many retailers to close. One way existing owners are looking to add value to retail properties is by repurposing them into mixed-use properties comprising office spaces, hospitality and retail outlets. Another is by converting them into residential assets.

“Much of the recent and current repositioning narrative centers on formulaic ‘retail to residential’ conversions,” cites placement agent JLL’s Unlocking Value report. “There is a risk, however, that by taking this relatively blinkered approach, the real value-add opportunity is overlooked and landlords are potentially closing the door on other fast-emerging markets.”

When repurposing an asset there can also be risks in terms of cost and complexity due to regulation issues. Pablo Beldarrain Santos, head of financial services solutions at augmented data fabric specialist Stratio BD, observes that retail owners use data to evaluate whether they should repurpose an existing asset or not.

“One notable example of data or analytics being used to drive investment decisions is the data sharing strategies of retailers and banks, fostered by private real estate funds with advanced analytics, which can create new business models,” he says.

Sondra Wenger, head of Americas commercial operator division at CBRE Investment Management, argues that retail owners must embrace e- and mobile commerce by adapting their physical purpose. “No matter the asset, retail must align with the rise of m-commerce, which will soon be the dominant share of digital retail sales,” she says. “Fortunately, m-commerce elevates the value of the brick-and-mortar store. During the pandemic, neighborhood, community and strip centers were able to pivot quickly to the m-commerce trends of click-and-collect/curbside pickups, and third-party delivery.”

2 Making structural changes

With changing tenant and end-user demand, certain real estate assets undergo the risk of being obsolete. Therefore, it is essential that structural changes are made to ensure these assets become attractive and fit-for-purpose.

Experts argue, the office sector is under the most pressure, as employees are reluctant to return to the office on a full-time basis. As a result, vacancy rates are higher – advisory firm Cushman & Wakefield estimates that hybrid working will create 350 million square feet of vacant office space in the US by the end of the decade. And so, the need for change is paramount.


Predicted square feet of vacant
office space in the US, according
to Cushman & Wakefield

Alfonso Munk, CIO of Americas at manager Hines, says: “With employees adopting hybrid schedules and placing a greater emphasis on wellness and sustainability, it is essential that offices become more attractive to occupiers and their staff in this new age of working.”

Jessica Wichser, global co-head private real estate asset management at fellow manager Partners Group, recommends creating spaces to encourage collaboration as well as high-tech conferencing capabilities, catering and entertainment. She also adds that offering amenities such as gyms can help attract talent, as more people focus more on their health.

Taking a different approach, Rob Naso, managing partner and head of US asset management at real estate investor BentallGreenOak, suggests launching programs that focus on employee wellbeing. “We have found that these types of consistent programming offer opportunities to collaborate and build trust, culture and connection to help tenants rebuild fractured cultures that dissipated while remote.”

3 ESG data as an investment driver

Over recent years, ESG has dominated the agenda, with investors now looking to make sound investment decisions that also incorporate sustainability. Data is a huge part of the decision-making process.


Value of ESG-focused institutional investment is set to reach by 2026 according to PwC

Yohan Hill, director of ESG and responsible investment at investment manager Adam Street Partners, says: “We are seeing more investors looking for mission-aligned investment opportunities, without sacrificing returns. Because of this, we are seeing more interest in investment vehicles that have ESG as a core objective. This drives the necessity of having ESG data available from the outset. It is not an afterthought anymore.”

ESG data is seen as a way to mitigate risk by identifying new opportunities and determining the right moment to make an exit. “Data analysis is complex. But it does matter,” says Robbie Epsom, CBRE Investment Management’s EMEA head of sustainability. “Once you have good quality data about assets’ sustainability performance, it can be analyzed and combined with financial data to present opportunities to benefit both the owner and occupiers.”

Despite the growing need for ESG data, there is an issue in terms of the quality and quantity of the data available. A study by Capital Group shows that almost half of US investors see “a lack of robust ESG data” as a pain point in adopting ESG.

Partners Group’s Wichser adds: “We have been viewing ESG data the same way that we’ve been viewing financial KPIs. But it is a significant challenge. ESG data is granular and not standardized. There remains a lot of work to be done in terms of collecting and categorizing ESG data.”

Digital tools are seen as a solution to this as they can help to scale and categorize ESG data integration.

4 Using analysis to determine an asset’s future

Aside from ESG, data is also helpful in determining an asset’s future – with proper analysis, managers can work out when the time is right to either sell or reposition an asset.
Cristina Garcia-Peri, head of corporate development and strategy at private equity firm Azora Capital, argues that yield is an important factor to consider. “Yield is always an important factor, and as market uncertainty grows and investors become more risk averse, they increasingly want most of their target return to come from yield.”

Tax is also key as in different jurisdictions there are different tax implications, and so it may or may not be viable to sell an asset. Garci-Peri says: “We do a forward-looking analysis into the expected return of a particular investment versus other investments we could make for the same level of risk. If we believe we can reinvest the capital today at better risk-adjusted returns, we will start a process of analysing those alternative investments in depth.”

5 Tenants demand quality

Across sectors, tenants are increasingly expecting high-quality services. For instance, in an office, creating spaces for colleagues to interact is key, Justin Meissel, chief investment officer and managing director, Europe, at Henley Investment Management says.

“Having some sort of cafe or food amenity outside of the internal canteen is really helpful because I think that the whole point of coming in and being with your colleagues is socialization,” he says.

There is also pressure from tenants for buildings to be more sustainable, and therefore of a higher quality.

To meet tenant demands, Sophie van Oosterom, global head of real estate at Schroders Capital, recommends centering a strategy around client needs. “There is a need for a client-centric, business-led approach that seeks to understand what role assets can play accommodating prevalent trends in society or business,” she says.

“The way assets are managed can contribute to the wellbeing and business models of their occupants. This needs to be understood and actioned to ensure long-term sustainable income and value from these assets for owners.”