Managers point to increased misalignment issues with operators

Active asset management has gotten more complicated in today's market, said panelists on a PERE Network webinar last week.

For many managers, a key focus in today’s market is actively managing existing assets while valuations are still uncertain.

“We’ve got $80 billion of assets, so in the current context, the number one thing we’re trying to do is protect the value of our assets and protect the value of our portfolio,” said Karim Habra, head of Europe and Asia-Pacific at Canada-based investor Ivanhoé Cambridge.

Speaking during a PERE Network webinar, titled ‘Portfolio Value at Risk,’ on Wednesday, he added: “Usually in this context people get excited; they see good deals, deals that are much better than any you’ve seen in the last five years. But the reality is, even if you do $3 billion, $4 billion, $5 billion of deals this year, it won’t radically change your performance if the rest of your assets go down and you’re not able to manage them well.”

There is little doubt that asset management is taking center stage while deal activity remains significantly subdued, but even this is not business as usual. Habra spoke of increasing misalignment in some scenarios, such as operating partners in difficult financial situations reducing their teams on the ground, thus moving their focus away from managing the assets.

“When there is more activity, when there is more uncertainty, when you’re in a less stable environment, these things happen,” he said. “Our goal is really to make sure to build this alignment again, because we are all in the same boat at the end of day.”

The panelists agreed that operational expertise is more important than ever in protecting the value of existing assets. For this reason, Eric Shepsman, managing director in the private real estate Americas team at Switzerland-headquartered Partners Group, said his firm has not been afraid to adjust the business plan – including changing operating partners – to help build resilience in the portfolio.

“We have had to make operator transitions where we didn’t think there was sufficient alignment or capability to bring a business plan to bear in this environment,” he explained. “And that has increased more recently compared with historically when everything was trending positively.”

With the higher cost of debt eroding valuations on the capital markets side, managing performance at an individual asset level also helps to retain some modicum of control over values.

“Historically, we see capital value declines and rental declines, but this time around we have actually seen rental growth continue, at least in the prime and key sectors,” observed Christina Forrest, head of EMEA value-add funds at New York-based CBRE Investment Management. “That’s a really interesting dynamic, especially if we think about asset-level value creation in sectors which have a structural supply-demand imbalance where we can create further growth.”

As asset management evolves toward a more operational model, panelists are finding they have to get closer to their occupiers. For CBRE IM, “that meant training and retraining people but giving them a focus and a specialism rather than being generalists at everything,” said Forrest. “If there’s one asset manager doing residential all the time, or doing logistics all the time, then they can be much more focused on what the occupier in that sector is doing, much more focused on speaking to the right agents in the market, and the right advisers. I think that’s crucial.”

More than a green premium

For Amal del Monaco, CEO of asset management and development, European real estate at Germany-based manager Patrizia, a key part of protecting portfolio value was implementing decarbonization plans. “We need to look at the property, we need to understand what will need to be improved, we need to run several scenarios and the output of this should be the price and the cap rate that we are willing or able to pay, and it will vary from one property to another.”

Regarding the office market in particular, panelists agreed there will be more than just a performance premium for sustainable assets. “I think it’s going to be radical,” said Habra. “It’s already very binary: assets which are green or that will be green are liquid; assets which are not or that have no potential to convert or to upgrade will be completely illiquid.”

To maintain liquidity, then, it is important to have the right business plan to be able to make the buildings in one’s existing portfolio as sustainable as possible. “Of course, in situations like this, what is tough is making sure you don’t throw good money after bad,” he added.

Viability for conversion to alternative or specialized uses is another key consideration. As Shepsman pointed out, “the layouts don’t always work, so there’s some functional obstacles that [mean] not every building is suitable for conversion to residential or life sciences or medical or whatever the desired long-term use is.”

Shepsman says another component is the fact that not all valuers are marking down illiquid offices appropriately. “Conversions will continue to increase in numbers as values for basically illiquid or out-of-demand office correlate with their actual long-term value, which is still in process from my perspective.”