Investor (Active) Asset Management (Depreciation # (Types of…
Investor (Active) Asset Management
Buy and hold
"Manage as needed"
High unit costs and exclusive ownership
likely that cannot diversity all specific risk
"specific risk represents a substantial source of risk in a significant minority of individual properties. At the highest levels, it is predominantly driven by lease events and by asset management"
low correlations to market?
Systematic risks: interest rates, legislation etc.
Specific risks: physical structure, lease, planning decisions, etc.
divisible ownership of companies
low unit costs to investment
high correlations between shares and market
market or sector tracking is a realistic aim
Bad: Take Benchmark positions
Good: Use pricing models to pick properties
Good: Take Positions based on forecasts
Bad: Diversify by buying many properties
Risk Reduction and Diversification in Property Portfolios, London: IPF
Unsurprisingly, large funds track the market more closely than small funds, because a greater proportion of their
specific risk has been diversified.
• The IPD Universe typically explained 45% of the variation in returns on a balanced portfolio of five properties
between 1994 and 2004.
• A portfolio of 20 properties ought to reflect 69% of the variation in the market, while a portfolio of 50 properties
should reflect 82% and a portfolio of 100 properties should reflect 89% of the variation in the marke.
• In order to achieve a 95% level of diversification a fund would need 300 properties.
Properties per fund - from 1981 to 2004, there has been a reduction in the number of properties per fund from just under 100 to around 50.
these porfolios cannot rely on diversification to eliminate all specific risk
need for identification and management of specific risk factors/portfolio attribute
Risk Web/Blundell/Journal Articles
this follows a prolonged period of consolidationin the 1990s and 2000s towards holding fewer and larger assets
increase in open and closed-end funds and in third party fund management as solutions for smaller institutions
many institutional portfolios of private RE in the UK contain between 25 and 50 properties
Manage to add value
numerous intermediaries are involved in the process
Implication: can't trade in and out of sectors at speed - reduces tactical flexibility
Private and decentralised market structure means trading slow and costly
Searching for assets (buyers)
negotiation (buyers and sellers)
marketing assets (sellers)
due diligence (buyers and lenders)
Leasing activity and tenant relations
attraction and retention of tenants, lease re-gearing
• Financial strength and guarantees
• Lease preferences
• Incentives sought
Building aspects should be appropriate and complementary
Portfolio aspects aim to have exposure to specific tenants and specific sectors of the economy.
Forecast of economic conditions and the property market can simulate the likelihood and extent of loss through vacancy or default under different scenarios.
Basic Phases: • Selection and vetting of tenants, negotiation of terms. • Performance, monitoring and enforcement of contract. • Renewal or termination of contract
Lease terms will vary according to property type, market practice and individual building e.g. review provisions, length, repair obligations
The UK is unique in Europe with longer leases (15 years), UORRs, leases are not indexed to the rate of inflation, and repairs and insurance are the responsibility of the tenant.
There are implications for how we manage and the nature of the cash flow that we receive
reduction of depreciation, improvement of income and cap. value
Enforcement of responsibilities during lease or recharge or repairs at end (dilapidations).
UK model of multi-let assets: landlord manages common areas and services, but tenants bear expense via a service charge
UK model for single-let assets: responsibilities passed onto tenants
Research shows this isn't the most profitable form of asset management
Potential for conflict: temporary tenants versus ongoing (owner) interest in asset
Non-recoverable costs, e.g. asset enhancement
Enhanced returns of reduced risks might be possible by active management of the existing portfolio (raising the risk adjusted returns)
Sector and locational difference occur
Types of obsolescence include
technological, functional, legal and aesthetic.
It can relate to: • External appearance
• Internal specification
Physical and economic stimuli influence asset values and expenditure decisions.
Depreciation in values is typically the result of either physical deterioration or obsolescence
Portfolios will require renewal over time and potential courses of action include minor refurbishments, major refurbishments, development or redevelopment, trading - transfer or problem.
Is the depreciation curable or incurable?
Evidence shows that there is a link between retention and depreciation - Baum & Turner (2004)
Environment and sustainability:
rising interest from corporate and public sector
incentives and regulation
For suppliers, do the rewards justify the development or refurbishment costs?
Higher sales prices? Higher rents? Fewer voids? Lower maintenance costs? Less depreciation? Reduced risks?
Papers - see sustainability report
What influences will these challenges have on choices, prices and supply?
Technology and its effects:
social and leisure
e.g. e commerce/online retail
FT article on Sears?
What Every Leader Should Know About RE (Harvard Business Review)
Difference between RE Business and Business RE:
RE Business - includes the industries and professions that design , finance, develop, construct , market, manage land, infrastructure, and buildings
Business RE - an organisations work places
Not merely an operating necessity; its a strategic resource
The 5 maxims discussed, highlight the issues that senior mangers need to understand.
Team With Professionals
The most efficient organisations often do the least to operate their business RE. Success will follow if:
the RE firm must agree not to focus solely on transactions but to work towards long-term goals such as strategic advantage, occupancy-cot reduction, and employee satisfaction
the organisation must be willing to share some control over its properties
e.g. CBRE, Colliers, JLL
smart landlords aspire to teamwork with their tenants, and smart tenants seek landlords with a long-term interest in their success
e.g. Canary Wharf
RE is not a core competence for most companies
'Green' buildings may cost more upfront but they deliver higher returns over the long term - short term view will discount these things
Harvard's Green lending programme, which provided low interest financing for energy-efficient projects across the university is one of the very few investments i know that made a higher return than the Harvard endowment over the last decade
Build in Flexibility
Sub leasing or sub divide
working from home, telecommuting
flexible lease terms allow companies to easily disband or shift operations
leaders need real estate intelligence: accurate data, synthesised into relevant information, interpreted in the context of corporate and competitive realities
wise leaders pay more attention to internal measures of facilities costs, productivity and utilisation than to fluctuations in the RE market
occupancy cost as a percentage of revenues and /or expenses
utilisation of building space and land, per person and per unit
occupancy cost per person and per unit
asset performance (measured by return on total investment)
Manage the Portfolio
A company's RE portfolio should be more valuable to the enterprise than the sum of individual sites - executives need a snapshot of this. They also need a dynamic, moving picture of where corporate strategy is driving their RE holdings and of how the footprint could change depending on the route they take.
e.g. costly CBD offices can be relocated to less costly submarkets (not necessarily distant)
Matching space and facilities (supply) to the strategic and operation needs (demand) - portfolio analysis
By comprehending an assets life-cycle holistically, leaders can anticipate (and possibly avert) project-level actions that compromise portfolio-wide gains.
companies that outsource also bare responsibility for facilities that house outsourced functions. Workers at those sites might not be company employees, but productivity depends heavily on the location and configuration of facilities.