Nils Kok

What's Next in Real Estate? Reintegrating the Value Chain

I recently gave a talk in Sydney (well, it's almost two months ago now…), and the organization (the Australian Green Building Council) asked me to "think out of the box" and to come up with "provocative statements". In other words, they wanted me to change my slide deck. That was easily resolved, using the services of my friends at Mr Prezident (the most amazing Prezi's you've ever seen…). But the "new next" took some more effort. Ultimately, I came up with the following picture:

In the traditional real estate value chain, there has been a drive towards segmentation, with specialization in every layer. The ultimate building owner (on paper) is just that -- detached from his investments. He no longer has a direct portfolio of properties, but invests via external managers, be it listed property companies or private fund managers. Alignment between owner and manager can be achieved through co-investment, but mostly happens through performance-based compensation. But, as we well know, performance fees are not perfect remedies for principal-agent problems. And owners have to resort to focusing on quarterly performance results, which leads to short-terminism among both managers and owners (ultimately, the employees of owners are also paid based on performance relative to peers). The typical fund manager (or property company) acquires and disposes of assets, but leaves property management (including, most of the times, maintenance and capex planning) to external companies. Enter disconnect two. External property managers might be better at achieving economies of scale for systematic tasks, such as cleaning, and they might have a better network to attract tenants. But the fund manager loses direct control of the property, no longer has a good feel for the satisfaction of the tenant and the technical state of the building. And again, the objectives of the external property manager are not necessarily aligned with the objectives of the fund manager, or, the owner. Then, there is the tenant. After all, real estate should be about the tenant. But the tenant is not really the person that occupies the property, it's a "tenant rep," who is usually not directly connected to, let alone in, the C-suite. The tenant rep has to find space that satisfies a number of parameters: location, quality and price. (Service costs are usually not part of this equation.) The ultimate satisfaction of the employee with the space is assumed to be positively related to these parameters. But…maybe there are other factors that make the employee happy -- and ultimately more productive. Light, space, (lack of) noise, vertical integration. Etc.

I think the disintegration of the real estate value chain brings many benefits, as specialization usually does. But it also has many disadvantages and a backlash is on the way. There is a trend towards reintegration of the value chain. Build-to-own. In-house property management. And closer control of the ultimate owner, through club deals and JVs. Most importantly, smart building owners put the pyramid upside down: the employee on top. Or the consumer in the shopping centre. Or the patient in the hospital. Real estate to serve the purpose of: increasing employee productivity, creating a shopping experience, enhancing patient recovery. That requires a better integration of tenant representatives in the average organization. Actually, real estate can play a much more fundamental role for business than is currently realized -- buildings should become more central to the business of the modern corporation, and they can be exploited to execute part of the corporate strategy. (Better buildings may assist in: attracting and retaining human capital, establishing and reaffirming a brand in the marketplace, and decreasing operational costs.) The upside-down pyramid also requires in-house property management, or better alignment between property managers and fund managers. And, fund managers should be compensated on a longer-term basis (not unlike the current discussion on compensation of executives in general corporations). That also requires paying analysts on a longer-term basis. Because the typical focus is a quarter, if not shorter.

There was a great article recently in the NY Times on "new office designs" and the impact on employees. (In New Office Designs, Room to Roam and to Think.) It talks about the modern office, and how employees perceive such offices. Thinking back of Sydney: you can see the move towards activity-based working happening in real time. Putting tenant satisfaction first will have many benefits. It will also result in more employees on the same floor plate. Something that should be in the equation of a tenant rep as well.

Global Consortium of Institutional Investors Integrate ESG Factors Into Real Estate Investments

 GRESB to join forces with GRI to enhance disclosure on sustainability in real estate sector

Amsterdam, April 4, 2012 – Thirty of the world’s largest pension asset managers, the major real estate industry associations and a large group of stakeholders have put their weight behind the Global Real Estate Sustainability Benchmark (GRESB), which this week released its third annual sustainability survey. GRESB also announced a partnership with the Global Reporting Initiative (GRI), to enhance disclosure on Sustainability Reporting.

GRESB has become an important tool in creating more transparency in the environmental and social performance of real estate investment managers. In 2011, more than 350 real estate fund managers and property companies responded to the GRESB Survey. The annual benchmark produced by the consortium is now actively used by more than 30 institutional investors to engage with their investments. Nils Kok, co-founder of GRESB: “It is our belief that benchmarking can help generate and strengthen market forces needed for more efficient use of energy and other resources by the real estate sector, lowering operational costs.” Sander Paul van Tongeren, APG Asset Management, a founding member of GRESB: “For investors, benchmarking sustainability performance provides the opportunity to take into account directly the risks of higher (and more volatile) energy prices, stricter legislation targeted directly at the real estate sector and changing preferences of (corporate) tenants.”

The overall goal of the collaboration between the GRESB and GRI is to advance the uptake of responsible business practices and making reporting on economic, environmental, and social performance in the global real estate sector standard practice. The aim of the partnership is to make the real estate sector among the top-three industries with the highest disclosure on sustainability performance, within a time period of three years. This will be enabled by the Construction and Real Estate Sector Supplement, GRI’s industry-specific reporting guidelines.

Real estate funds and companies can participate in the 2012 GRESB Survey free of charge, allowing them to benchmark their portfolio against peers in the industry. Participants will receive an individual scorecard, offering a unique insight into their relative sustainability performance against peers and leaders in their region. More information about GRESB and the Benchmark can be found at www.gresb.com.