Ami Kotecha, Co-founder and President of AMRO Partners, looks into what goes into the the short and long term goals of real estate investors in Locale's 'Tech Equity' paper. As investors in the commercial real estate sector, our observation is that there are key megatrends that continue to play out and impact medium to long-term investment decisions.
These can be summarised as shortening lease lengths; growing significance of a customer-centric approach to real estate management; an increasingly central focus on ESG; growing fluidity in work and, therefore, in the nature and geography of the workplace.
All the above trends have an impact on real estate valuations - influencing ERVs, yields and cap rates to determine the quality of investment opportunities. Whereas the traditional approach to investment was heavily influenced by a mix of locational characteristics, tenant collateral and information asymmetry about deals. By contrast, the ongoing market dislocation, most apparent in the office and retail sectors, is additional proof that in today’s world investment decisions require access to a great deal more data than they did five or more years ago.
Not only do commercial real estate investors require access to reliable data to drive micro and macro-level insights, but they also require it in efficient and highly customisable formats. This has led to a growing demand for tech platforms that help investors organise, analyse, contextualise and slice & dice data.
The reason we believe that tech is a leveller is that it creates greater equity across CRE investors of all sizes. We see a plethora of solutions today that provide a variety of value-added services that would have been difficult to access for smaller investors without huge additional investments in manpower and resources.
A few significant areas covered by tech solutions are:
• Locational and micro market data with increasingly more dynamic factors
• Transactions and deal flow management
• Capital structuring, including leverage management
• Management and reporting of financial and non-financial risk parameters, including ESG
• Tech-enabled investment decisions have a positive impact on total returns.
The fact that there are solutions available to suit a variety of investors and business sizes makes it possible to selectively onboard solutions to stay at the leading edge. Moreover, they also provide the potential to derive excess returns. Greater granularity through bottom-up rigour applied to any stock selection process is, ceteris paribus, likely to lead to improved pricing and risk-reward profiles.
A case in point is ESG data. The question often asked is, ‘who will pay for it?’ Investing in ESG data and management solutions can be challenging because there are no standardised formats or data validation processes in place and, in effect, it can become extremely resource intensive and a barrier to entry.
However, we also observe that investment in ESG performance and management tools can lower the cost of capital and provide access to high-quality investment partnerships and hence can pay for itself. Moreover, the risk mitigation process becomes better defined and inevitably leads to improved LT return profiles whilst contributing positively to the environmental and social impact of investments.
Lastly, we see a growing trend in democratisation in terms of transparency and liquidity with solutions ranging from fractionalisation and tokenisation to blockchain ecosystems for transactions management and AI/ML-driven marketplaces. The increasingly broader access to underlying investment opportunities continues to play out the megatrend mentioned earlier- that of making the sector increasingly less siloed, more sustainable, more liquid, and therefore, more efficient in serving its customer base.
Our overall observation is that technology continues to play a central role in the evolution of real estate as an investment asset class, and in more ways than one, it continues to act as a leveller by providing opportunities for greater participation in the sector.