How to future-proof real estate 2023

The passive ownership approach of viewing real estate only as a location from which to produce contractually guaranteed long-term rental income returns is quickly becoming obsolete. Nowadays, forward-thinking investors apply active ownership strategies to all real estate industries.

It is critical to recognize the influence of the quickly changing market environment on various locations, markets, asset classes, and – most importantly – tenant demand. Only then can investment and management strategies be appropriately customized.

Importantly, there is a requirement for a client-centric, company-driven strategy that aims to comprehend the function assets might play in accommodating prevailing societal or economic trends. The manner in which assets are maintained can impact the well-being and business strategies of its tenants. This must be comprehended and implemented to guarantee that these assets generate long-term, sustainable income and value for their owners.

This client-centric, enterprise-driven strategy is also required to obtain the most effective investment options for a certain trend. The form of the investment in real estate, whether direct or indirect, through loans, or on the public market, should be determined by relative value, governance preference, opportunity, and access to the finest operators.

At the asset and portfolio level, as well as with regard to investing and management, owners and managers should prioritize three main areas: sustainability, operational excellence, and solutions that provide flexible contractual forms and investment structures.

We call it the real estate Crisis of today.

Asset-level sustainability and operational excellence
Sustainability and operational excellence are frequently cited separately, yet at the asset level, they are closely intertwined. Through its physical characteristics, real estate enables investors to modify and reposition assets for the current environment, ensuring that they may be efficiently run. This involves minimizing the use of scarce resources (such as water and energy), waste, and carbon emissions, while favorably impacting the business models of renters and the well-being of the final occupants.

This strategy may need more services, more intensive management on the ground, and/or significant capital expenditures in order to transform the assets into more energy-efficient ones. Nevertheless, only when these factors are incorporated can the long-term relevance of the assets for occupiers be ensured and the business models of occupiers flourish (and thus their ability to pay rent). The result is long-term, sustainable income and financial returns for the owners during the holding period.

(Rather than zero-sum) solutions that are beneficial to both tenants and property owners.
All real estate investments are operational in nature since they provide diverse options to tenants and investors, ultimately matching the asset’s operations and revenue with the performance of the occupant’s company. Herein lies the advantage as well.

Many real estate investors and conventional lenders have been hesitant to include operationally aligned, more flexible income conditions in contracts. This income is viewed as riskier than income from long-term leasing arrangements that resemble bonds. In the current climate, however, the owner already “owns the downside risk” of a tenant’s business model failing. A proactive, operational, hospitality-like strategy that permits variable conditions to maximize revenue should be viewed as facilitating a virtuous loop.

The benefits of operating each asset as a separate, efficient business are evident. By selecting and supporting tenants with more adaptable solutions, it is possible for them to endure more unpredictable market conditions and societal shifts. It assists renters in coping with rising (energy) expenses, interest rates, and (sustainability) laws. As a result of preventing bankruptcies, vacancy, and obsolescence, a partnership strategy will likely maximize the long-term revenue and value for both sides.

Understanding and managing real estate assets in a sustainable, operationally superior solutions paradigm is the first step in developing a portfolio that is future-proof. At instances of economic turbulence and market upheaval, it should be capable of producing genuine performance.

The strategy may also be applied to investment selection and portfolio creation. The same principles apply: connect investments with sustainable trends and prioritize operational excellence in the partner responsible for implementation. The optimal risk/return-weighted, relative-value investing strategies that capitalize on the detected patterns may subsequently be discovered via the use of a solutions-based methodology.

Sustainable trends in selection at the portfolio level

We are now considering four long-term trends that have a substantial long-term impact on the global market for real estate.

Technology and the information economy

The interface for employment has evolved, concentrating revenue and value in buildings that cater to tenants’ changing wants and preferences.

Increasing individualism

The pandemic has expedited the evolution of human preferences, including lifestyle and consumption decisions, hence exacerbating gaps in demand between and within affected industries.

Aging populations and demographic changes are growing concerns.
Rapidly shifting demographic profiles are rebalancing the lodging markets, with certain areas experiencing structural undersupply.

Linking individuals and locations

In order to maintain circularity and prevent obsolescence, higher industry and regulatory standards necessitate a comprehensive strategy to investment that generates good environmental and social effect.

Matching investing strategies to capitalize on these developments provides a favorable market environment. According to the proverb, it is easier to swim with the tide than against it. Thus, picking the greatest chances within these strategies necessitates a thorough evaluation of which market sectors provide the highest relative value. This must take into consideration the characteristics of each market using a consistent risk/return framework to evaluate opportunities.

Individualism, for instance, is intricately intertwined with the continuous expansion of e-commerce. Investing in logistic warehouses is a natural real estate strategy that would profit from this development. In recent years, a large number of investors have done so, resulting in huge value rises. There has been an almost indiscriminate valuation of predicted growth, going beyond the fundamentals over the long run. The closest alternative investment methods, which involve investing in assets that ease assembly in the “last mile” or offer out-of-town convenience, are vulnerable to the same enduring theme. Nonetheless, these chances have been comparatively neglected and may offer a higher risk-adjusted return.

Our patented relative value approach assesses risk and returns in various market areas against the benchmark-required Sustainable returns on a continuous basis. It aids in identifying high-return possibilities.

Investing with operational excellence necessitates identifying the best partner capable of executing the specific investment plan. The appropriate partner must comprehend (local) supply and demand dynamics and be operationally embedded in order to service the assets. Important is knowledge of how to convert long-term trends in a given market and how to link the investment’s performance with the occupier’s commercial success.

Last but not least, when seeking investment outperformance, several structural solutions should be evaluated to best accommodate governance preferences, the duration of the expected investment opportunity, liquidity requirements, and market timing that corresponds with the investment strategy.

For instance, investments intending to profit from a short-term supply/demand disruption or a “fix/sell” are often best managed directly or through a short-term, closed-end structure. On the other hand, investments looking to profit from long-term structural trends are best accessed through low-cost capital arrangements or partnerships with longer durations. In addition, relative and risk-adjusted value inherent in the explicit price of the various structures (think “possible overshooting” of long-term fundamentals on the listed market) are essential factors to examine.

It is possible to combine direct investments in assets with investments in open-ended funds, closed-ended partnerships, listed funds, or real estate loans. In the end, all investment formats offer exposure to income and value from real estate, which might profit from the same underlying trends. Optimising and combining multiple investment formats enables optimal access to operational excellence and opens up the whole real estate investment market.

Philosophical discipline, flexible execution

As is the case with all investments, success cannot be confirmed until it can be duplicated. The SOS framework is intended to support every investment and our approach to asset management in order to sustainably outperform the short-, medium-, and long-term investment objectives of our customers. The strategy is created with a focus on hospitality. It is intended to be adaptable and nimble in operations, and to foster long-term relationships with key stakeholders, including investors, renters, society, and the environment.