The need to take a much more active approach to managing real estate assets has become more acute than ever. In pandemic times, managers need to do two things – catch-up on known trends that have suddenly accelerated and change their approach to managing risk.
“With covid, the age of risk is behind us and the age of uncertainty is in front of us,” says Jason Oram, partner and fund manager at Europa Capital. “The age of risk was all about basing future expectations on experiences of the past, and huge amounts of analysis [went] into those past experiences. In this new age of uncertainty, you have to manage beyond uncertainty as best you can. But that can provide opportunity.”
In the quest to create and sustain value for investors, managers agree they need to move from asset-focused management and put the emphasis on the needs of their occupiers in a post-covid environment. Focusing on health and wellbeing, amenities and sustainability will lead to increased lease renewals and new tenant attraction, industry sources say. Meanwhile, the acceleration of structural changes in real estate will accentuate active management, particularly in struggling asset classes.
“Hospitality and retail are the sectors that have generally required the most active management during the pandemic, because this is where demand has been the most affected by lockdowns,” says Laurent Lavergne, global head of asset management and development at AXA IM Alts. “You cannot just take a ‘wait-and-see’ approach; you need to engage with tenants and operators to find solutions and ensure you’re ready for when things return to normal.”
Lavergne notes managers should be taking advantage of lockdowns to accelerate the refurbishment of assets in affected sectors, where construction work is permitted. The aim is to improve the user experience – in shopping centers, for instance, the French investment giant has seen increased footfall after converting retail space into a leisure offering. In the office market, Lavergne also predicts a wave of refurbishment activity as landlords renovate older stock to support values. “Significant capex spend will be needed to meet the higher levels of services and flexibility increasingly requested by tenants.”
Repositioning of assets driven by tenant demand in strategic locations can also be fruitful despite the pandemic, Lavergne says. “We’ve successfully repositioned an industrial campus in the Berlin area into an office asset, which has enabled us to sign a 15-year lease with a new tenant right in the middle of the pandemic.”
AXA IM Alts is now working on improving the energy efficiency of the asset, Lavergne adds.
Beyond location, the so-called placemaking approach has had a positive impact on tenants – enhancing, in the end, the value of assets.
This strategy is one of the reasons why the entire portfolio of The Valesco Group, an investment manager focused on core assets across the UK and continental Europe, increased in value by nearly 20 percent at the end of 2020. “Every single asset has gone up in value and that’s because the quality of each of our assets has also gone up,” says Shiraz Jiwa, Valesco’s founder and chief executive. “For example, we’ve increased the green credentials and the green rating of every one of our buildings.”
Jiwa explains Valesco’s strategy is focused on buying assets out of complex situations, capitalizing on pricing dislocations, to then add value through active asset management, paying attention to tenant covenants, and nurturing and strengthening the relationship with occupiers. “You can create value through the quality of the relationship with the tenant and better understanding their drivers – for instance, by increasing the sustainability credentials of the building, providing capex contributions in exchange for lease extensions and ensuring a strong focus on the amenitization of your buildings.”
During the pandemic, the firm has applied this approach within Thames Valley Park, in Reading, where it owns Microsoft’s UK headquarters.
“We’ve been driving a repositioning, which started over a year ago, of the business park in which you have Microsoft, Oracle, Hewlett-Packard and Sanofi among some of the high-quality tenants, because we want to turn it into the top technology park in the UK,” Jiwa says. “We’re talking about amenities, wayfinding systems, online and offline ecosystem development, wellbeing, external meeting rooms on lakes and bringing incubators to sit alongside the tech institutions. Tenants are delighted with this initiative, so they’re willing to contribute to ensure that the ecosystem of the business park allows for the greatest attraction of talent and additional high-quality occupiers.”
Valesco’s approach is paying off. Across its €2 billion portfolio, the firm last year achieved 100 percent rent collection and delivered a net current income of over 8 percent and a net running IRR of more than 15 percent. This compares favorably with its core peer group, which delivers on average a net current income of 4-5.5 percent and a net IRR of 7-8 percent, Jiwa says.
Repurposing with a ‘green’ eye
For Michael Neal, Nuveen’s chief investment officer for Europe, given the pandemic has accelerated structural trends in real estate, the need for asset managers to be more agile and knowledgeable has deepened across all sectors.
“In every sector an opportunity can be presented. For instance, secondary shopping centers where covid has notably accelerated structural change are starting to be repurposed, in order to provide residential or other types of mixed-use assets,” Neal explains. “That awareness, residual land value and where you can add value from alternative use has only intensified.”
Valesco’s Jiwa adds there is a real opportunity today to create value by acquiring Grade B stock. “Quite frankly, well-located B quality space is where there could be an opportunity to buy vacancy because it’s cheap now. And then repurpose or reposition it and turn that Grade B stock into Grade A. If you’re prepared to hold it for a while, you can make a healthy profit.”
Whether it is through capitalizing on pricing instability in an acquisition, a full repositioning to change the use of a property according to market demands, or a refurbishment investment to promote wellbeing among tenants, market participants agree it is possible to create value during a crisis.
This time, though, there is another element highlighted by the pandemic that is thought to drive value going forward: a clear move toward sustainability.
“Our asset management teams work closely with our sustainability teams to ensure that business plans are focused on managing transitional risk, to get our buildings to net zero carbon, because it’s what we as a business, our stakeholders and the market want,” Neal says, noting that Nuveen has just committed to a net zero carbon pathway for all its portfolios by 2040. “You can likely generate higher returns through ultimately providing the space that occupiers demand, which incorporates these sustainability aspects.”
Europa Capital’s Oram highlights that this pandemic has “very usefully” shown the need for owners to have a social impact and sustainability mindset. “This has been one of the huge benefits of the pandemic, for us to think increasingly differently about our built environment and the impact it has on our communities, on the world in which we live going into the future – and that’s a huge opportunity for value creation going forward.”