Most people in property can say they understand how real estate operates. But, to truly understand operational real estate is to know exactly what you’re looking for.
Often this might be hidden away in the data, meaning it’s not an issue until it becomes an issue. Or it might never become a problem, but then, by not knowing it was there, could it be holding back an area of performance? You might think your asset is performing, but how do you know if it really is, at least, to the best of its ability?
Take Purpose Built Student Accommodation (‘PBSA’) as an example. A sector where, until recently, investors have relied on yield compression, rental growth and low operating cost inflation to achieve performance, how can you now be sure your assets are still outperforming the market when these factors are far from certain in 2024?
How do you identify the gaps in performance easily and identify the marginal gain to directly impact positive investment values?
As an example, take rents. How do you know they are keeping pace with market levels? Often investors rely on their property manager to understand what is happening in the macro leasing market and set rents accordingly, but given every property is unique (e.g. scale, amenity offer, vintage, specification, room mix etc), how do you know they have the required level of insight across that market for your specific asset? Furthermore, managers across operating sectors are typically renumerated in part based on a share of income. This has the potential to lead to some operators ‘pushing to fill’ occupancy and missing the opportunity to maximise revenue in the process.
During leasing cycles are you rebasing rents on your assets and if not, then why not? How much revenue are you potentially missing out on by not adjusting rents as leasing velocities change?
How do you know you have the right operating model when it comes to staffing, maintenance and marketing, and whether it’s right for the asset or its customer? How do you know your assets operating model is not simply the operator applying the same ‘cookie cutter’ approach, rolled out the same operating model across all their markets, regardless of the assets individual and unique fundamentals.
It leads to the question, is someone benchmarking operating performance for you and, if so, against what? The reality is that too often the operators are marking their own homework, providing their own city operating cost averages or bucketing performance by asset scale. This has its own problems because operators are only using their data, potentially portraying a one-dimensional view of what is the right operating model.
How do you know your assets’ current operating model matches service specifications in nomination agreements, partnership agreements or the management agreement? When was the last time you checked the PMA? How do you know you are getting what you have paid for in terms of service levels or that you aren’t overproviding services relative to what is needed at the asset or by the university partner?
If you don’t know the answer to these questions, then it’s perfectly possible that you are losing valuable revenue without knowing you are, missing potential red flags which could create operating issues in the future and subsequently not achieving the performance you and your portfolio/assets deserve.
There’s a forensic approach to operational real estate that is most certainly required to get the best out of the beds sector. Auditing should encompass all these questions and more.
That’s how you see the problem coming, the opportunity hidden, and the value missed. The Asset Managers that take these steps, guided by true operational experts, will be the winners.
The devil is always in the detail.
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For further information, please contact:
Laura Gibson, Calvermont, laura@calvermont.com or +44 (0) 7493 7222294
About AREA
AREA is a leading independent firm of commercial real estate advisors specialising in the Alternative property sectors.
AREA provides forensic level analysis and insight supporting the transaction and operation of Alternative Real Estate enabling clients to get significant competitive advantage.
Formed in 2021, AREA is a unique Alternatives Advisory business, supporting the activities of institutions, asset managers, developers and occupiers predominantly in the BTR, Hotel, Roadside & Student Accommodation sectors.
