Be active, not passive
Our world is evolving at a dizzying pace, perhaps more so than at any other time in history. Technology and digitalization are forcing many of the changes society is experiencing – the rise of online shopping, the ability to work remotely, even exercise classes in the comfort of our homes – and the covid crisis of the past year has served to accelerate these trends.
The inevitable outcome is that how people interact with the built environment is also evolving. And for real estate managers and institutional investors the impact is profound, forcing many to take stock of the physical assets in their portfolios and rethink how to keep them resilient, future-ready and attractive to a younger, more discerning demographic that expect far more than just floor space from the homes, offices and shops they frequent.
And so, a passive approach to asset management simply will not cut it any longer. To ensure properties stand out from the competition, attract future tenants and, critically, avoid obsolescence, active management is key to enhancing the value of assets and continuing to deliver returns to investors.
Changing rooms: Repositioning the asset
One active management approach increasingly used to combat asset obsolescence is changing the use of the physical space – with retail perhaps the most obvious illustration of this trend.
As consumers turn to online shopping in ever greater numbers, shuttered units and ghost malls have become an all-too-common sight. Retail landlords are left with the dilemma of what to do to keep space relevant and, of course, attractive to future buyers. And many have reached the conclusion that a total repositioning of the asset is the way. Some, for example, have turned large retail units into mixed-use developments, dedicating less space to retail and more to office and residential, and other forms of leisure use.
“Looking at old buildings that are not going to serve that full retail function anymore, and how we can repurpose them, is probably the big value creation story for the next two to three years for our sector,” says Chris Gardener, head of European retail investment at CBRE.
Space as a service strategy
Why should real estate not be seen as a service, rather than just a space? That is the question posed in our deep dive on this strategy – another manifestation of the active asset management techniques being deployed.
Managers have to work much harder now to attract tenants and users to their properties.
Merely handing over the keys to tenants, sitting back and watching the rent flow in does not go far enough. Tenants are now seen as customers, not just a blunt revenue stream – and that necessitates a more service-oriented approach from landlords.
In the office sector, for example, tenants seek additional amenities like lounge areas and creative spaces to encourage better employee collaboration and innovation – even gyms and leisure areas to cater to the growing demand for better work-life balance and the increased employee productivity that brings to a business. In residential, hotel-like concierge services and communal spaces are becoming the norm. Retail needs to be not just a shop, but an experience – a day out.
And it is not just about offering funky new amenities. Modern tenants no longer want to be tied into long leases, so landlords are having to develop more flexible leasing models, too.
Sandrine Lafon-Ceyral, head of asset management and SRI policy at Amundi Real Estate, sums up the benefits of this more service-oriented approach: “Landlords not only create value in rents, thus enhancing the value of their assets, but also make tenants stay for longer, which helps to have more resilient cashflows.”
Know your tenant
It is the recurrent theme throughout this report: the most progressive-thinking asset managers know that a vital part of the value creation puzzle is to get closer to their tenants, to understand their needs and how they are using space.
There are now efforts by landlords to establish more direct lines of communication with users, sometimes in the form of tenant surveys and also through more onsite visits. This allows managers to more actively manage their portfolios; stay on top of and responsive to emerging market trends; and optimize space, whether through repositioning, space as a service strategies or more flexible leasing models.
“That deep working knowledge of our tenant base is invaluable [to] create value and inform wider investment strategy,” says Stephen Cahoon, head of asset management for Europe, Cromwell Group.
It is no exaggeration to say that modern investment and asset management relies heavily on capturing real-time big data from portfolios in order to understand how assets are performing both operationally and financially, and to alert landlords as to where changes can be made to enhance value and improve cashflow. Alexander Gebauer, CEO West Europe at Allianz Real Estate, comments: “Data has become the enabler that amplifies the know-how and existing capabilities of the building’s asset manager.”
Managers can also use data to inform them about which locations are most likely to attract tenants and, of course, higher rents. German investment manager Patrizia is using artificial intelligence to do just that. “We have invested in artificial intelligence to more precisely understand how to plot our future course,” says the firm’s head of international funds, Paul Hampton.
ESG is now widely accepted as an essential value creator, not simply a cost or compliance burden.
With the real estate sector a source of around a third of global carbon emissions and consumer of about 40 percent of global energy, it is mission critical for asset managers to integrate sustainability into portfolios. And with many assets in locations subject to the worst ravages of climate change, property owners and managers have a vested interest in playing an active role in reversing the problem.
Indeed, ESG mindfulness is a growing requirement of building users who increasingly will only sign leases for spaces that can either demonstrate, or commit to, initiatives like energy efficiency, health and wellness, natural lighting and good air quality. Failure to embrace sustainability is potentially catastrophic to the value creation agenda. A point made clear by Partners Group head of real estate asset management, Jessica Wichser: “If you don’t do it, you are at risk of running into a gating issue, where potential buyers and tenants just cross your asset off their list.”
They said it
Expert views on value creation and asset management
“Will the job of an asset manager become more difficult? Yes, but at the same time a lot more interesting, multifaceted, business-minded, lively and rewarding”
Alexander Gebauer, Allianz Real Estate
“By renewing and repurposing, tired old buildings can be converted into leading-edge, highly efficient assets”
Phil Cowling, Cromwell Property Group
“We used to be in an ownership situation where we monetized space. Now, we have to include more and more services and flexibility in the space we offer”
Sandrine Lafon-Ceyral, Amundi Real Estate
“Real estate has become a lot more operationally intensive with owners effectively having to work harder to sustain income”
Jonathan Bayfield, Aviva Investors
“Significant capex spend will be needed to meet the higher levels of services and flexibility increasingly requested by tenants”
Laurent Lavergne, AXA IM Alts