Operational Real Estate Risk and Reward (February 2021) Full Report




Full Report

Operational real estate (ORE) is mostly 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.

How to address the issue of risk when pricing operational assets is lacking clarity, however, with inconsistency in the approach to making real estate investment decisions, while various attributes important to assessing risk in ORE may be unfamiliar to real estate professionals.

Areas addressed by this research include:

•           A definition for operational real estate, differentiating it from traditional real estate investments, 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 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 paper concludes with recommendations of what should constitute best practice for investors and real estate practitioners.

A summary of the research is also available to download.