Operator Selection – It’s all about Accountability, Transparency, Trust & Innovation
By Tally Russell, Associate Director in Operational Services at Alternative Real Estate Advisers (AREA)
The theory of best practice asset management is clear – an asset or portfolio should be well managed with high occupier approval ratings, market aligned revenue, minimised costs, managed risks and accretive value initiatives progressed.
For any asset manager, covering all these required areas can be challenging. Therefore trusting in a third-party to manage your asset or portfolio becomes a necessity, and it’s never more critical than in the operational living sector.
Its not surprising that in the operational living sector, third-party management holds the key to a successful asset. The living sector, by its nature, experiences high tenant and staff turnover, high obsolescence from intensive use and a regular rebasing of rental levels. Now, even more so, it’s a consumer focused sector where reviews and ratings count. The resident’s experience can make or break your asset’s future performance.
Trusting your asset or portfolio to a third-party operator is therefore key, but too often the operating agreement is perceived as a necessary evil ahead of asset mobilisation. The negotiation of the agreement is often overshadowed by fee discussions, while other important terms get downplayed or missed. This happens either because investors don’t appreciate they are areas of negotiation or there is a strong desire to expedite the asset onboarding process. What might seem like minor commercial points initially can be critical for accountability, innovation, value and ultimately, performance.
It is only when a problem arises that AREA are often asked to find a solution through forensic analysis. By this stage trust, reliability and transparency between the investor and operator are usually diminished, leading to lost time in remedying the situation, additional costs and ultimately a reduction in asset or portfolio performance.
We argue that success starts with the basics, selecting the right operator and making sure an operating agreement is drawn up at the outset. This agreement should embed the elements of risk and performance factors into the conditions that an operating party must meet. It might not be the glamourous side of real estate, but in the long run, this saves you money and time and provides your operator with a clear direction on what you expect from them.
- Operator Selection –
Take PBSA as an example, if you ask around, most in the industry could name half a dozen operators. In recent tenders, we have received expression of interest from up to 14 different operating parties. It’s exciting to see this level of competition in the sector including a handful of new entrants, but it doesn’t mean all are the right fit for your asset or portfolio. Each operator will have a slightly different approach to operating; from staffing models and use of contract services, to purchasing utilities and strategy for targeting a specific audience. Selection of an operator is as unique as the asset or portfolio itself.
I’ve never heard a client regret running a tendered process. Competitive tension by its very definition, fosters innovation, value creation, transparency and ultimately, ensures risks are identified and mitigated; which in the long term, saves you money.
Tendering & Forming the Operating Agreement:
Managing risk should mean actively ensuring that an operator appointment is the best fit for your asset or portfolio. Holding a selection process to find the best party isn’t enough.
The only way to really ensure your asset is in good hands is to draw up a robust, negotiated operating agreement which clearly outlines the expectations and practices that the operator needs to follow and how to implement them.
Such an agreement determines long-term success and effective operational activity. It shapes governance and financial structures and is crucial for addressing specific expectations. It balances the landlord’s need for control and flexibility, minimises risk and sets the asset up for optimal performance. Should issues occur, the agreement should safeguard termination and exit and include a redress system for instances where the investor believes performance is not good enough. Benchmarking service provisions and evaluating both quantitative and qualitative values against the type, vintage and key risks of a specific asset or portfolio is essential.
AREA is known for applying a forensic level of analysis and insight gleaned from true operational experience to provide clients with competitive advantage. That’s why we have been appointed to tender operating services for over 5,000 living units in the last 12 months, by institutions including the likes of BlackRock, BP Investment Management, Threadneedle and Schroders. With these tenders we look for accountability, transparency, trust & innovation to drive opportunity, manage risk and provide new thinking and ideas.
After all, if you’re going to handover the responsibility of the performance of your property, you need to trust that everything has been thought of and that whoever is appointed is a force to be reckoned with and has true accountability at every stage of its management.
