Had an interesting session with a group of students on active management of real estate portfolios the other day. It still puzzles me that there is so little work on real asset or property management. I know Danielle Sanderson is completing her PhD in this area at the moment. We had a go at defining active management in the context of real estate portfolios. I don’t really like the “headline definition” in the IPD/Goshawk report,
‘An improvement in asset or location quality can be achieved through refurbishment, redevelopment or ‘place making’ and an increase in the security of income can be achieved through lettings, lease re-gears or the removal of breaks’.’
It focuses too much on a few specific actions. The best that I can come up with is
‘A style of real estate asset management that, in addition to predictable real estate management tasks, emphasises non-routine managerial interventions by the real estate manager with the aim of improving assets’ risk-adjusted performance. Among other things, active real estate management may involve modifying assets’ legal, physical, use, financial and occupational structures and attributes.’
Whilst performance is often attributed to allocation or stock selection skill, David Geltner saw stock selection effects as a function of four sub-activities: – property selection, acquisition transaction execution, operational management and disposition transaction execution.
There’s so little solid research done in this area that we don’t know very much. In our class discussion of “operational management”, a few familiar (to me) themes came up.
For large funds, the range of intermediaries between the principals (i.e. decision-makers) can result in missed opportunities to enhance performance. Often it seems to be hard to get owners and/or asset managers engaged.
Fund, asset and property managers may be missing opportunities to add value because they have other priorities. How many asset managers are focussed on transactions rather than existing assets?
Entrepreneurial personalities may be best at identifying and executing asset management opportunities but such personalities may not be attracted to property or asset management which requires technical knowledge of landlord and tenant law and construction technology, can be fairly procedural and detail driven.
Outsourced property managers have most contact with the building and the occupiers. However, the business tends to be low (can even be no) margin and is highly ‘contractualised’. Are this group of personnel going to identify asset management opportunities?
Small, agile, highly incentivised investors tend to be better at identifying and exploiting active management opportunities?
It’s also possible that anecdotes provide a misleading impression here and we tend to anchor on “man bites dog” examples. There are investors who specialise in active management plays. There are clearly value-added or opportunistic investors who specialise in ‘repositioning’ real estate assets.