Schroders’ van Oosterom on future-proofing the asset class

The passive ownership model of treating property simply as a space from which to generate returns by collecting rental income is fast becoming a thing of the past. Today, the most forward-thinking investors are adopting active ownership approaches that recognize the unique and changing characteristics of different regions, markets, asset classes and above all tenant demand, then tailoring their investment and management strategies accordingly. 

Critically, they are acknowledging the need for a customer-centric, business-led approach that seeks to understand how buildings contribute to the business models of their tenants.  

Increasingly, this requires real estate owners and managers to focus on three core areas – sustainability, delivering operational excellence, and providing solutions that allow new contractual formats and investment structures to keep pace with these trends. We call it today’s real estate SOS.  

Sustainability and operational excellence

Sustainability and operational excellence are often quoted separately, but in practice they are heavily interlinked. By its physical nature, real estate affords investors the ability to adapt and reposition assets for the modern world, to ensure they are operating efficiently – for example, by minimizing CO2 output, by contributing positively to tenants’ business models, and ensuring the well-being of the occupiers. As such, the long-term relevance of assets is secured and circularity is ensured. 

While this approach may require ­additional tenant services to be offered, or even require additional capital expenditure to transition assets to be more sustainable and efficient in operations, ultimately it increases assets’ value over the medium-time horizon that real estate is typically held. 

Solutions that are virtuous (rather than zero sum)

Providing different solutions to tenants, and investors, aligning the asset’s operations as well as income, ultimately with the success of the occupier’s business, makes all real estate more operational and less of a pure financial contract. Herein also lies the upside. 

Many real estate investors and traditional bankers have been wary of an operational element in income that is perceived to be riskier than a bond-type, long-term lease contract. However, in the current environment, an operational approach should be seen as enabling a virtuous circle. 

The benefits of applying a hospitality approach toward tenant services, investing to reduce waste and CO2 output and allowing more flexible contracts – in short, running each asset as an efficient business by itself – helps tenants gear up to survive today’s more volatile market conditions and changing societal demands. It helps tenants and owners deal with higher energy costs, higher interest rates and increasing sustainability regulation, and to pay for this. In short, a partnership approach will likely optimize long-term sustainable income and value for both parties. 

Reorientating and transforming real estate into a value-add service model is key to creating future-ready portfolios capable of delivering against return expectations through economic volatility and market disruption. The SOS ­philosophy is the optimal path to achieving it.