The benefits and challenges of operating assets

Emerging sub-sectors of the real estate market, including co-working and build-to-rent residential, were highlighted as growth areas by panellists at the Commercial Real Estate Finance Council Europe’s Spring Conference in London on 16 May.

Nick Knight, executive director of valuation and advisory services at CBRE, said flexible and well-managed office space was a growing priority for employers eager to attract the best staff: “The war for talent has grown in importance.”

Knight explained that managers investing in properties containing co-working spaces have the option of forming partnership agreements with existing operators, creating their own co-working platform or providing a traditional fixed-term lease to a third-party operator. He added that the latter was the most favoured of the three options: “Long-term triple net leases have allowed investors to invest passively for many years, so they are the foundation of many lenders’ credit policies. So, it is not surprising investors have opted for providing fixed leases to operators such as WeWork.”

Enrico Sanna, chief executive and co-founder of co-working brand Fora, argued that “the traditional workplace model is broken”, and drew parallels with the disruption Airbnb created in the hotel industry. “Customer behaviour changes over time,” he said. “People who, 10 years ago, would have stayed in a Hilton are now using Airbnb. [The real estate industry] needs to get used to operational risk. It is mitigated first and foremost by creating scale.”

In a separate discussion on the housing sector, private rented accommodation was highlighted as a burgeoning area. Alexandra Notay, build-to-rent fund director at fund manager PfP Capital, acknowledged the sector encompasses all rented accommodation excluding social housing. “It takes in the good, the bad and the ugly,” she said. “It’s the only sector I’ve come across where professional operators are almost asking to be more regulated, in order to differentiate those creating a new asset class from the historic perception of dodgy landlords.”

Financing properties from alternative asset classes with an operational nature can present challenges for lenders, admitted Jamie Bennie-Coulson from RBS International’s real estate finance division. Among these challenges is the difficulty in providing evidence of stabilised net operating income for properties in emerging sectors.

He added that valuing an operating asset for a lending deal requires layers of due diligence: “We take a lot of comfort from the bricks-and-mortar value, but we also need to consider it on a yield basis.”