Schroders on cultivating a customer-centric approach

A shift from passive to active ownership models is key to achieving operational excellence at the asset level, says Schroders Capital’s James MacNamara.

This article is sponsored by Schroders Capital

The changing dynamics of the real estate market and progressively more demanding tenants are prompting property owners to rethink value creation and asset management strategies.

Being a landlord today is increasingly like any other customer-service orientated business, argues James MacNamara, head of operating real estate strategies at Schroders Capital.

What major trends are currently affecting tenant demand?

James MacNamara

Tenant requirements are changing as technological advances and demographic shifts continue to transform the way we live, work and play. As a result, the way an occupier wants to use a building is often not in line with what it was originally designed for. For example, the range of communication tools that are now available completely changes the cost/benefit consideration of traveling for face-to-face meetings and maintaining a corporate culture.

While that does not necessarily mean every meeting will go online, it does imply that the owner of a workplace needs to rethink how the space is used to accommodate these shifting requirements and to assess whether these requirements can be commercialized. We are already seeing tenants paying significantly higher rents for flexible lease terms and amenity-rich spaces.

Such services are a crucial driver of value, and delivering them requires a specific skill set. Outsourcing these drivers of value and thus relying on an external party to deliver the appropriate standard of service can be fraught with issues.

“As tenant requirements continue to evolve, landlords will need to ensure they take an active approach”

Tenants and landlords alike are also very much aware of the importance of real estate in the energy transition, and the costs of this are now widely reflected in asset pricing. This transition is a multi-year journey, and the industry is collaborating well to ensure there are consistent and transparent industry standards around whole-life carbon counting, net-zero targets, carbon pricing, transition risk assessments and built-environment commitments.

As the industry progresses on this journey, the diversity of buildings means there will be no single retrofit solution but rather a need for a bespoke solution for each property.

Given the scale of the challenge across the industry, there is likely to be insufficient capacity for managers to simply outsource the analysis and retrofitting of their portfolio. Managers are thus investing heavily in staff training and finding ways to collaborate and share findings across the industry to ensure they can tackle the known challenges ahead.

Are changes in tenant requirements affecting owners?

As tenant requirements continue to evolve, landlords will need to ensure they take an active approach to meeting these requirements, regardless of the remaining lease duration. Not doing so risks longer-term obsolescence. This risk is being recognized by various market participants, including lenders and valuers, which are already assigning a higher probability of such obsolescence in their projections, thus lowering present values.

An active approach to asset management requires having a customer-centric approach to understand and meet the needs of the users of the space and then being able to deliver the required services to a high standard, all while maintaining profit margins.

In the living sectors where leases are typically short, it is no longer sufficient to simply relet the same space while accruing a reserve for repairs. Tenants expect much more from their living space, and many landlords can meet these requirements by tailoring their offering to specific user types and by providing various additional amenities.

Tenants also expect their landlords to be more client-centric and be able to interact with a landlord representative on ad hoc, day-to-day issues. For landlords with hundreds or thousands of tenants, being able to address ad hoc issues in a cost-efficient manner requires having a strong operational management team in place that is supported by extensive IT systems – as is common in other client-facing industries.

It is not surprising that assets in the living sectors are either trading to owners with operational platforms already in place or are trading with a dedicated management team in place.

Delivering on this active approach to long-term ownership requires a wide range of skills within the management team. The alternative of just waiting until a long-term lease expires for another tenant with similar requirements to sign another long-term lease is no longer an option.

How can real estate owners provide amenity-rich spaces?

Amenity-rich spaces may include food and beverage, concierge services and wellness facilities. To ensure these are delivered to a high standard, real estate owners are increasingly setting up and operating these amenities themselves rather than outsourcing them. This more active style of ownership requires a wide range of skills to execute beyond simply determining what the offering should be. Interior design, attracting and training talent, putting the systems and processes in place to operate consistently – these skills are like those found in the hotel industry.

Executing on this approach requires individuals with creativity and flair who really understand and care about the local occupier requirements and are not just ticking boxes. It also requires individuals who can ensure the strategy is operated well, with the appropriate systems and processes in place. Managing many different small businesses, in line with institutional standards, requires a different approach to managing a portfolio of large businesses.

How should managers stay ahead of changing tenant requirements?

Firstly, each market has its own nuances, so it is important to have senior professionals located in the market. Changing tenant requirements can redefine an investment thesis, and understanding how these requirements change over time is critical. Senior professionals located in the market with an entrepreneurial mindset and the necessary empowerment are well positioned to see and adapt to those local market circumstances.

Historically, local teams tended to work independently as operators for various allocators, but the trend is moving toward integrating these operators into larger pan-European or global platforms, given the increasing regulatory requirements these operators and allocators are required to meet.

“Services are a crucial driver of value, and delivering them requires a specific skill set”

This is helpful for investors as well as for the operator teams themselves, as they can access more diverse types of capital and draw on common resources that are better and/or are more efficiently suited to shared, centralized functions.

Secondly, it is important to ensure that local teams can access a wide range of data, tools and systems across multiple asset classes and geographies. This helps with relative value assessments and ensures a consistent approach to underwriting risk and return across countries and sectors.

Thirdly, having sector expertise to provide proprietary data, insights and skills is key. For example, at Schroders, we manage both the real estate and the day-to-day operations of hotels.

This provides us with detailed operational data which can help us to identify and adapt to opportunities and threats at an early stage. It also means we obtain insights from a range of specialists across interior design, branding and marketing, revenue management, IT and sustainability.

Our hotels team comprises many former hotel general managers, which helps foster a customer-centric approach at all levels of the company.

Will a customer-centric approach help add investment value?

The real estate industry clearly benefited enormously from the accommodative monetary policies of central banks around the globe post-global financial crisis. That period of historically low cost of capital is now well and truly behind us.

While we may ultimately see policy rates trending downwards, in the medium-term it is more likely that a higher portion of capital value uplifts will come from rising income generated by asset management initiatives rather than by a lower cost of capital.

These asset management initiatives will need to identify how occupier requirements are constantly changing in local markets and how to adapt the space and deliver the services required in a profitable and sustainable manner. This requires a wide range of skills, specialist expertise, local knowledge, data, and above all, a customer-centric approach. Those managers that can provide such solutions have a greater ability to protect and add value over time.

The current environment has seen significant repricing of assets and a protracted period of limited availability of debt and equity in certain sectors. In such periods of dislocation, there are also likely to be more situations where a seller needs to solve multiple issues, involving several stakeholders, to close a transaction.

Those managers that are well positioned to be an attractive counterparty are likely to find more interesting investment opportunities. That means having a wide range of capital solutions, the technical skills to find a bespoke solution, a reputation for dealing fairly during lengthy negotiations and having the optimal asset management skills after closing.

Companies that can find and execute on such situations while at the same time delivering the operational excellence that is necessary to navigate the current environment should produce superior risk-adjusted returns for their clients.