3 Top Concerns Your Investors Have

banner-3top-300px

As the commercial real estate (CRE) market continues to draw attention as a desired asset class for investors, we take a look at some of the top concerns investors have when deploying their capital with their partners.

In this 3-part series, we will explore concerns surrounding partner selection, closing deals and identifying underperforming assets. We will then discuss the implications for asset managers, especially those in the mid-market, and what they can do to remain competitive when working with institutional partners.

Navigating Market Uncertainty

52creWith the commercial real estate market deep into its recovery period and capital continuing to flow into the sector from around the globe, questions continue to arise on what the best investment strategy will be for the short to medium term. This is evident as fund closing levels are at their lowest in 8 years, large amounts of dry powder are sitting on the sidelines waiting to enter the market, and opportunistic funds are growing in popularity as a key strategy—all signs of increasing uncertainty ahead. Additionally, a recent survey by NREI stated that over 50% of CRE professionals believed that the CRE industry is in its peak phase . Subsequently, investors are beginning to question how they will best manage these risks as interest rates increase and cap rates decompress.1,2

While this has led to additional scrutiny over investment strategies, it has also kicked off assessments of current partner performance, as investors must choose who they will want by their side to navigate this change. This will put added pressure on all partners, but especially those whose results have been subpar, as investors question how they will rebound and do so in a more volatile market where speed and operational excellence will be needed even more.

In the first installment of our series, we will address the first concern investors have on whether their partners have the capacity to identify and quickly secure properties on the market.

Positioning Your Business with Investors

As many global investors continue to grow their positions in an already saturated real estate market, finding promising assets with many of the best properties already locked up continues to be a challenge. This has led investors to build strategic plans with strict criteria for who their partners should be. Firms who have underperformed are quickly eliminated along with those who are in the wrong property type or region. This may seem like it narrows the field for potential candidates, however, it may also lead to more specialized firms being considered – those who have performed exceptionally well for other investors and are looking to grow their book.

This jockeying for position leads to investor’s first major concern:

Concern 1: Can your asset management firm efficiently deploy their capital and be competitive enough to secure promising assets?

For many companies, the answer is yes. Most will say they are well positioned in the transaction community, receive deals as soon as they hit the market, and are always monitoring the back channels for off-market opportunities. If everyone is well positioned, how else can you be evaluated? To put it simply, on your ability to vet and recommend deals faster than your competitors – that is, to close. This raises the question of whether necessary investments into optimizing business processes have been made to ensure you are operating at or ahead of the pace of your competitors. Essentially the key question becomes: are you moving fast enough for your investors?

Filtering Through Volume: Finding the Best Assets

The short answer is never fast enough; every day with capital sitting on the sidelines is another day it is not earning returns and this is how investors are measured, on their returns. So in a market where many of the best assets are already spoken for, the search for promising assets can leave managers sifting through once overlooked properties that now seem more attractive. Additionally, it will often mean having to vet higher volumes of deals in less time. Deals which may be inherently carrying more risk and are attempting to be offloaded at the peak of the CRE cycle. This means that more time and due-diligence must be spent identifying and pulling safe and promising opportunities from the deck.

So as your team begins to sift through opportunities looking for potential acquisitions, staying close to the street for in-market and off-market deals is essential and how fast you can move on a deal to close is critical.

Speed Wins: Assessing Prospective Returns

Since deals rely on detailed analytics and cash flow assessments rather than initial yield, having the ability to decipher and build detailed cash flow models quickly is of the utmost importance.

goalIf deals are in-market, building the first cash flow model is somewhat easier as they will come with enough information to get started. To build an effective model, it is essential to break down tenant agreements for existing rents and operating costs and to flesh out assumptions around market rents and rollovers that may create vacancies. However, if deals present themselves in off-market scenarios then building these models from scratch will be challenging and time consuming due to the lack of information provided. Assumptions around tenant lease agreements, rollover, the current state of market rents, and operating expenses are all hypothesized and will require multiple versions and approximations of value. In the case where these properties do come back as high-potential properties, additional comparisons of the prospective acquisition against the existing portfolio of your investors will have to be done. What they are looking for in returns, as well as major events that will cause risks to the portfolio must be considered.

Time is rarely on your side and your investors know this. But that is just the beginning. Small inefficiencies in a single deal can be quickly compounded, creating extra work only to find out that the deal in hand may not work for your investors. When you multiply this over dozens or hundreds of deals, what can often be justified as slight workarounds become events that put your team farther away from your goal of closing on the right property. Additionally, as time goes by, it is easy to start seeing less attractive properties as potential candidates and thus brings increased risk into the buying process for investors.

The Struggle to Compete

runFirms who have the freedom to reallocate resources and bodies towards this process may not feel the burden of these inefficiencies as much, but mid-market firms with tighter budgets will struggle because they do not have those additional resources on hand. Staff are often stretched thin and time is rarely on your side, so ramping up to get through prospective properties becomes a game that cannot be won by simply logging more hours. It is for these reasons that larger institutional investors gravitate towards partnerships with larger firms who can move faster, stay ahead of the competition, and secure the best properties.

So how can firms win and remain competitive? By investing in solutions specifically designed for asset and portfolio management that increase capacity, reduce second-guessing of model accuracy and improve the overall operational efficiency of existing business practices. These asset and portfolio management solutions are designed to get to decisions faster for a number of reasons. They help dissect market assumptions faster across groups of tenants at once, meaning you no longer have to change every single line item one-by-one. These asset and portfolio management products also help you build models quicker because you can leverage past models easily and take existing rates and build them out across prospective tenants to get a complete picture of a property’s prospective operating income. Finally, where these solutions often save the most time is by running scenario analysis. With the click of a few buttons and quick changes to input values at the individual asset and portfolio level you get to best, base and worst case returns faster with greater accuracy.

Evolving Your Business to Win

Building investor trust is highly dependent on delivering results, so investing into your operations and specifically into asset and portfolio management solutions will increase your competitive positioning in the eyes of your investors. These investments also give you the ability to exchange data across your team with ease, integrate and re-structure data and quickly build models to understand the value proposition of an asset. To that end, firms who neglect scalable solutions that can help them secure the best properties and get ahead of their competition will continue to struggle, especially in increasingly uncertain market conditions where losses can quickly escalate. It is this reason why firms must take every opportunity to move quickly to secure prized assets and in doing so will alleviate one of the first major investor concerns.

In our next article, we will discuss another major concern investors have: complex scenario analyses and risk mitigation planning.

Join us for a complimentary webinar in November

During our November webinar we’ll introduce you to ARGUS Enterprise’s (AE) ability to turn the hours of typical spreadsheet work for validating property deals into a handful of button clicks.

Learn how to:

  • Leverage cashflow information to quickly generate powerful scenario-based comparison reports
  • Effortlessly run new property scenarios against your existing portfolio
  • Analyze new deals quickly to stay ahead of the competition
  • Plan for future equity needs through AE’s cash flow analysis

Attendees will come away with a clear understanding of the productivity-boosting capabilities of ARGUS Enterprise.

Simply select your geographical location below to register for the “Validating Deals Faster with ARGUS Enterprise” webinar.

AMER-Icon

AMERICAS

Validating Deals Faster
with ARGUS Enterprise
Thursday, 9 Nov. @ 2:00pm CT

Sign-up-button

EMEA-Icon

EMEA

Validating Deals Faster
with ARGUS Enterprise
Thursday, 9 Nov. @ 2:00pm GMT

Sign-up-button

APAC-Icon

APAC

Validating Deals Faster
with ARGUS Enterprise
Friday, 10 Nov. @ 12:00pm AEDT

Sign-up-button

About the Contributor

Damien Moore is a Senior Advisor at Altus Group with a focus on the application of new technologies and existing operating lines within the institutional commerical real estate sector.

1 Source: PERE: Fundraising Volume Fell By 50% in Q3, Meghan Morris, www.perenews.com , October 2017
2 Source: Is CRE Past the Market Peak?, NREI Staff, National Real Estate Investor, December 2016

This publication, or any part thereof, may not be reproduced or transmitted in any form by any means without the express written permission of Altus Group in each specific instance. The material in this document has been prepared by Altus Group based on its data and experience. This information is believed to be accurate at the time of its preparation; however, no responsibility can be taken for errors or omissions. Any advice contained herein is of a general nature and should not be relied upon unless confirmed with Altus Group. Altus Group makes no representation about the accuracy, completeness or suitability of the material represented herein for the particular purpose of any reader.

cover-article
Download a free PDF version of 3 Top Concerns Your Investors Have

Download PDF

Altus Group to Announce Fourth Quarter and Full Year 2016 Financial Results on February 23, 2017

TORONTO (February 2, 2017) – Altus Group Limited (ʺAltus Groupʺ or “the Company”) (TSX: AIF) announced today that it plans to release its fourth quarter and full year financial results for the period ended December 31, 2016, after market close on Thursday, February 23, 2017.  Robert Courteau, Chief Executive Officer, and Angelo Bartolini, Chief Financial Officer, of Altus Group will host a conference call and webcast at 5:00 p.m. (ET) the same day to review the financial results and discuss corporate developments.

Altus Group Simplifies Commercial Real Estate Debt Management with ARGUS Enterprise 11.5

AE 11.5 Combines Debt and Risk Management Functionality With Heightened Productivity to Provide the Most Comprehensive Global Asset and Investment Management Solution for the Commercial Real Estate Industry

Download the press release

TORONTO, ONTARIO-(Marketwired – Oct. 12, 2016) – Altus Group Limited (“Altus Group”) (TSX:AIF) a leading provider of independent advisory services, software and data solutions to the global commercial real estate (“CRE”) industry, has launched ARGUS Enterprise 11.5 (“AE 11.5”), the most advanced version of its industry leading commercial real estate asset and investment management platform. AE 11.5 delivers robust debt and risk management functionality together with enhanced ease of use capabilities. AE has been adopted by thousands of customers around the world and by 8 of the 10 largest real estate service providers.

Invest With Firms Who Invest In Themselves

Investing for Success

The global commercial real estate (CRE) market continues to provide consistent year over year returns against a backdrop of slow economic growth and political uncertainty, positioning these assets as less of an alternative and more of a preferred asset class. However, for those looking to increase their positions in CRE, a search for the right partner can be a time consuming process of wading through the field of investment firms vying for additional funds. Most claim to have unique strategies, deliver superior returns, leverage deep bench strength, and years of experience – all meant to signal trust and credibility – yet all sound the same.

Phil Tily Joins Altus Group’s Altus Analytics Business Unit

Altus Analytics Strengthens Advisory Capabilities in Europe

Altus Group, a leading provider of independent advisory services, software and data solutions to the global commercial real estate industry, names Phil Tily as Senior Vice President, Altus Analytics Advisory. Phil will be based out of London, United Kingdom and serve as Head of Performance Analytics.

CMCS Announces a Business Development Agreement with Altus Group to Provide Comprehensive Real Estate Development Lifecycle Solutions in MENA Region and India

Download the press release

DUBAI (September 21, 2016) – Collaboration, Management and Control Solutions (“CMCS”), a leading project management consulting organisation, today announced a business development agreement with Altus Group Limited (“Altus Group”) (TSX: AIF), a leading provider of independent advisory services, software and data solutions to the global commercial real estate (“CRE”) industry. This agreement allows for joint business development and sales of Altus Group’s ARGUS Developer product in the MENA region and India.

on-geo Announces Referral Sales Agreement with Altus Group to Provide Comprehensive Commercial Real Estate Solutions in European DACH Region

*Release distributed by on-geo*

Download the press release in German

MUNICH (August 1, 2016) –on-geo GmbH (“on-geo”) a full service real estate valuation specialist to the European investment and real estate markets, today announced a referral sales agreement with Altus Group Limited (“Altus Group”) (TSX: AIF), a leading provider of independent advisory services, software and data solutions to the global commercial real estate (“CRE”) industry. This referral sales agreement allows for joint business development and sales of Altus Group’s ARGUS suite of solutions within the European region of Germany, Switzerland and Austria (DACH).

Altus Group is expanding globally by going where its customers are going

Toronto real estate services company followed its clients into international markets, then expanded its products and services through strategic acquisitions, becoming a one-stop shop for commercial real estate companies worldwide.

“Technology is increasingly important for clients as the real estate industry expands in scope and reach, and leading edge technology is another important aspect of the Altus Group success formula. Its ARGUS Software, which came through an acquisition, is part of a suite of complete solutions Altus Group offers for transacting, managing, and growing commercial real estate portfolios across the world..”…… Continue Reading in The Globe and Mail

Is the CRE industry prepared for the sustainability changes ahead?

With less than two years until the UK’s new Minimum Energy Efficiency Standards (MEES) come into effect, it’s becoming abundantly clear that the country’s real estate industry is far from prepared for these new regulations and the impact they could have on the value of domestic portfolios.

Beginning April 1, 2018, landlords will no longer be able to issue new leases or renewals on properties with an Energy Performance Certificate (EPC) rating below E (F and G rated properties).  And by 2023, all existing commercial property leases will be affected by MEES. From a cash flow perspective, these assets will be effectively worthless and according to a Jones Lang LaSalle (JLL) study, this could affect nearly 20 per cent of commercial properties in the UK.