Fund managers at real estate companies of yesteryear might get a small culture shock were they to visit a modern-day operation.
In the past, support functions such as research, asset management and transaction teams were clearly demarcated. Real estate asset management was in the early stages of its development and different departments fulfilled separate functions within organizations. But nowadays, these functions are far more integrated.
So what has changed and what are the reasons for this evolution? Within Savills Investment Management for example, the research function has been moved to a central part of the business to make it a key part of all major decisions affecting funds and clients. This is quite typical of many real estate investment managers, although some are more advanced in this process than others.
Traditionally, the research department would provide some property level support for the fund managers. But primarily, its output was largely for marketing purposes. It would be the fund managers who would assess the markets and assets themselves. There was no buy-side advice, just sell-side, and they would also manage the actual assets themselves, too.
Nowadays, real estate has become much more mainstream and international as an asset class and as a result, new functionality is needed to manage investment funds. Increased competition and global capital flows have changed the market irreversibly.
Today’s fund managers are still in charge of performance, but their roles have evolved. They cannot cover all their required functions without closer support. Whereas in the past, they did not need to know the macro environment or analytics, today fund managers need to act at least as one-third researcher, one-third asset driver and one-third portfolio manager. This is similar to equity fund managers, although for these their dependency on research is probably even greater.
Real estate fund managers today need a wider skillset to understand the needs of their clients, such as the liabilities of pension schemes or insurers, and specialist knowledge in various areas such as tax, finance and currencies. There is also more cash flow modelling around sensitivity analysis. The movement towards volatility awareness is growing with the ultimate goal of providing a return assessment commensurate with a risk profile, in other words: risk-adjusted returns. This is difficult to do when risk cannot be condensed into one number, unlike the return part of the equation. The Holy Grail for real estate is defining risk into one number.
Fund managers also require their research departments to conduct macroeconomic and thematic analysis. This forms the house view, a constantly updated statement of what the company believes is happening at a high level in economics and capital markets and therefore the implication for real estate fundamentals. This is important to create a reference point from which the fund, marketing and sales teams (and potentially a firm’s investors) can always understand a company’s thinking on key real estate markets and sectors.
In summary, real estate fund managers need to understand how everything comes together to drive performance and control risk. Having an integrated team sitting together has become a natural evolution. The increased integration is also beneficial for investors in that it delivers better returns and execution delivery.
Going forward, what further changes can we expect? Technology is constantly evolving and it will play a part. But unlike many other industries that face the prospect of robots replacing personnel, real estate investment management is more likely to see the adoption of artificial intelligence being employed to analyze market behavior and patterns.
What is certain is that there will be ever more ‘big data’ available and in turn, the research/investment process will need to be more quant-focused, not only in order to understand the data but how it will impact the two sides of the equation: risk and return. This means fund managers will need to have a good understanding of quant to evaluate properties because the information available on each location and market will be ever greater.
Increasingly then, the folk at the forefront of this understanding must work closer with those making the investment decisions. That’s how firms wishing to stay relevant to investors can stay competitive.