The Rise of Operational Real Estate (OpRE) and Its Drivers

Operational real estate (OpRE) has become a popular investment strategy among institutional real estate funds, offering a unique risk-return profile. OpRE enables investors to generate higher cash flow distributions and business value. Unlike traditional real estate investments, OpRE provides investors with more control over the asset's utilization and the potential to achieve positive ESG (Environmental, Social, and Governance) outcomes. However, this requires a greater time commitment and a certain critical mass to reach efficiency.

Defining OpRE and its Diversity

According to INREV, OpRE is an investment in a real estate asset structured to create a strong correlation between the returns to the asset owner and the underlying operational performance of the operator or occupant. OpRE investments typically involve a different risk-return profile compared to non-operational investments. These investments can be accessed through various structures, including operational services agreements, joint venture arrangements, or by taking equity stakes in an operating business.

Drivers of Industry Change and New Opportunities

Several factors are reshaping the real estate industry and influencing the rise of OpRE:

• Decreasing Need for Space and the Growth of Service Businesses: The physical need for space is decreasing, and real estate is increasingly transforming into a service (SpaceAsAService). In addition to traditional leasing, there's a growing need to produce, sell, and deliver services. Premises are increasingly used for multi-use and multi-location purposes.
• The End of the Era of Zero Interest Rates: Tracking cash flow and financial planning are becoming more crucial. The difference between the book value and the (fair) market value of an asset is growing in importance.
• Slowdown of the Real Economy: Monitoring performance indicators, particularly occupancy and rental levels, is essential. The optimal tenant mix is increasingly relevant. Understanding the financial situation of tenants is critical.
• Sustainability (ESG) Becoming Mainstream: Environmental issues have become central. Tenants are interested in the environmental footprint of the properties they use. Investors are avoiding properties with poor environmental ratings. Legislation and reporting requirements are increasing.
• The Impact of Artificial Intelligence (AI): AI will dramatically change things in the long term. Real estate is the largest asset class globally, but its investment and asset management processes are still largely manual and Excel-based. AI offers opportunities to streamline operations and automate processes.

New Opportunities and Digitalization

Industry change is opening up new opportunities. Looking in the rearview mirror is no longer sufficient; data and its management are becoming critical success factors in real estate asset and investment management. There is a need for more consolidated operational data and information beyond just rent to optimize returns and manage revenue streams. There's a demand for new and improved digital tools that provide an up-to-date and forward-looking view of the property, contract portfolio, financial performance, and predictive metrics.

Customer Data Management is Essential

Managing customer data is critical for operational real estate. To effectively manage customer data, it is important to have a holistic view of each individual tenant. This includes:

• The space they occupy
• The breakdown of sales in terms of space and services
• Agreements: validity, expiration, proposals
• The state of the tenant's business: stable, growing, or decreasing
• Their needs
• Other locations they might have

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OpRE Investment Structures

There are three main investment structures for OpRE within the context of funds:

1. Investment Manager-Owned Operator: The investment manager owns the operator that manages the property.
2. Fund-Owned Operator: The fund owns the operator that manages the property.
3. Third-Party-Owned Operator: A third party owns the operator that manages the property.

Summary

OpRE is a growing investment strategy that offers unique opportunities for investors. However, it requires a deep understanding of industry changes, customer data management, and risk management that differs from traditional real estate investments. In the future, data, digitalization, and sustainability will play key roles in the development of OpRE.

And for that, in our opinion, you need new set of software tools, like Assetti.

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