IPF News

IPF Publishes Investigation into Operational Real Estate

10 Feb 2021

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Operational real estate (ORE) has previously been associated with alternative real estate types, as opposed to the traditional sectors of office, industrial and retail property, and many investors view these assets as complex, illiquid and opportunistic. However, deal volumes and allocations are increasing as investors are drawn to the prospect of capturing the extra upside associated with a well-run business or a newly emerging business model. Demand for high quality, recurring, long-term income, coupled with a relatively attractive yield profile and the ability to actively manage the assets, are also contributing attractions.

A study for the Investment Property Forum Research Programme, by Didobi Limited, in partnership with Heriot Watt University and Nottingham Trent University, addresses a number of issues and includes:

  • A definition for operational real estate, differentiating it from traditional real estate investment, and why it should not be treated as a subset of the real estate ‘alternatives’ universe;
  • How real estate investors assess and quantify risk when underwriting an ORE investment opportunity, with a review of theoretical investment modelling techniques that may be used in this process;
  • An examination of modelling techniques currently adopted by investors, drawing on feedback from a survey of active pan-European ORE market participants;
  • A comparison between the preferred theoretical approach to underwriting and current market practices; and
  • The identification of potential gaps between theory and practice in assessing and quantifying risk in the ORE sector, the main gaps being:
    • Under-analysis of the variability of cash flows;
    • Over-reliance on modifying a traditional discount rate to reflect risk;
    • Insufficient emphasis on NPV as the preferred method of appraisal;
    • Inappropriate application of the concepts of tenant, tenancy and rent; and
    • Skills gap of real estate practitioners.



The paper concludes with recommendations of what should constitute best practice for investors and real estate practitioners.

Bill Page, Head of Real Estate Markets Research at Legal & General Investment Management Real Assets, who chaired the Project Steering Group (PSG) overseeing the research, commented: “Operational real estate is no longer just the preserve of alternative property types and is a rapidly growing source of income in offices and, especially, retail. The importance of understanding and measuring the unique attributes of risk is therefore paramount and this research adds transparency to what is, for many, still an opaque part of real estate investing.”

Didobi Director and Co-Founder, Matthew Hopkinson, leading a team of researchers drawn from Didobi and Heriot-Watt and Nottingham Trent Universities, said: “In an increasingly complex real estate investment market understanding the underlying risks associated with income, especially when linked to operational real estate, is critical. Having the right skillsets, approach and data in order to appraise and manage this risk will determine the level of returns achieved by investors.”

A summary of the research findings is available to download from the IPF’s Resource Library. The full report, which is available to IPF members only currently, will be free to access from May 2021.