The relationship between investors and investment fund managers is in the midst of change. This is in large part because the tech-savvy younger generation expects to have timely access to accurate information. Investment managers that fail to respond to the changing demands of clients will find themselves at a competitive disadvantage.
The need for accurate reporting seems self-evident, but in fact it has been a long time coming. Two regulatory-driven events in the United States have been particularly influential. The first was the passage of the Sarbanes-Oxley Act in 2002. Designed to protect investors from fraudulent accounting practices, the legislation placed new emphasis on providing accurate data to both public and private players.
“Investment managers that fail to respond to the changing demands of clients will find themselves at a competitive disadvantage”
In the years that followed the enactment of Sarbanes-Oxley, it often seemed that investors and investment managers could do little wrong. In hindsight, however, financial reporting was surprisingly lax. Then in 2010, in response to the financial crisis and recession, the Dodd-Frank legislation triggered a new wave of regulations and forced investment advisors to re-examine their processes and information flows.
A new age of reporting
In large part because of these two watershed events, investors today demand a greater degree of accuracy, and timeliness, of information reported to them by investment managers and more transparency in their relationships with them. Moreover, investment managers themselves are placing additional demands on property managers for information beyond a financial statement. They, too, expect timely, accurate and easily integrated information that does not need to be entered into multiple software solutions.
Investors also seek customizable reporting programs that address their specific needs and investment parameters. Fund managers that fail to heed that call, often relying on outmoded systems of reporting, risk endangering those relationships.
“In the digital age, there is neither room nor reason for a disconnect between investor, investment manager and property manager”
Coinciding with the higher standards set by investors, technology solutions have emerged in recent years to bridge the reporting gap with increasing efficiency. Today, software providers offer cloud-based, fully integrated platforms designed to enhance the quality, accuracy and transparency of reporting and analysis.
In the past, many investment managers have turned to customized proprietary systems to provide the necessary reporting and help them make more informed business decisions. They have come to realize that these outdated tools are inadequate to meet today’s investor demands.
There are many reasons why investment managers have been slow to embrace technology. Complexity and the cost of transferring data to a new platform is one. To a large degree, that stems from the complexity of real estate as an asset class. A single lease may have hundreds of data points to track. Moreover, property managers and the systems they use track those data points in a variety of ways.
Further complicating matters is the nature of technology itself, which is in a constant state of flux. New methodologies, such as blockchain, promise databases that are centralized, secure and interactive. It is a good bet blockchain will be the next big breakthrough in driving further reporting accuracy and transparency. Right now, the field is still in its infancy.
Once a manager has invested in a system, the hurdles to change are significant, particularly on the property side. Investment managers are bound to what they have purchased and are accustomed to, until the need for a new direction becomes unavoidable. But the heightened pressure for transparent, regular and reliable information indicates that the time for a fresh approach to reporting has arrived. For today’s investment managers, the call to action is clear: Adapt or get left behind.
For managers in need of expert advice in navigating the transition, third-party providers go well beyond creating the program framework. The consultant’s role includes helping clients get up to speed by aggregating and inputting data. Needless to say, any system is only as good as the data it receives, a fact that underscores the value of trust among the participants. No matter how advanced a data analysis program may be, the old principle of ‘garbage in, garbage out’ still applies.
Embrace the future
The benefits to the investment manager of adopting newer technologies are clear. Everyone in the chain of ownership can work on the same page, utilizing the same timely, relevant data as well as analytical tools that can provide vastly deeper insights into the decision-making process. By fulfilling investor expectations of greater transparency, accuracy and flexibility in reporting, today’s tools can go a long way toward securing the investment manager’s place among the client’s trusted advisers.
How do such programs accomplish that goal? Data analysis today is much more than tracking occupancy or net operating income. Rather, it engages the entire ecosystem of the individual asset and the performance of that asset as part of the larger portfolio.
Programs created specifically for investment managers provide dashboards that can be configured to dissect performance data by a variety of characteristics, such as region, sector or manager. Users can drill down through a fund to a single property or tenant, allowing investors to gauge their exposure at any level. Yardi’s InvestorPlus module, specifically created for investment managers, is just one example of such a program.
Additional customizable filters allow users to measure the performance of assets against key indicators, such as cap rates, net operating income and annual return, and industry benchmarks like the NCREIF property index. Such capabilities allow investors and managers to gauge possible overallocation in underperforming categories or underallocation in hot regions or property types, providing the basis for shifts in buy/sell strategies.
These applications also provide a mechanism for data integrity and data governance through the entire ownership and management chain, while ensuring transparency. In short, everyone compares apples to apples.
Toward predictive analytics
Traditionally, the real estate industry has relied on the rearview mirror as a predictor of future performance, but history goes only so far in providing accurate forecasts. Software systems are harnessing investors’ appetite for more operational data, which can be used to develop robust predictive analytics and better control over risk profiles. By leveraging cashflow forecasting models that create scenarios for properties in the acquisition/disposition pipeline, users will be able to see into the future.
In the digital age, there is neither room nor reason for a disconnect between investor, investment manager and property manager. Accurate, timely data is available at everyone’s fingertips, and the reliance on cloud-based software programs will only grow as the capabilities of prescriptive and predictive analytics advance.
The implication is clear. As old models for risk management in commercial real estate investment fade away, so must many long-held beliefs. Cash may still be king, but it must now share its throne with a new co-ruler – data.
This article was sponsored by Yardi. It appeared in the Fund Services and Technology special supplement that accompanied the September 2018 issue of PERE magazine.