What is Real Estate Investment Portfolio Management?

portfolio management

Real estate portfolio management differs radically from managing equity, bond or mutual funds in that real estate managers are not only responsible for asset allocation, risk management and transaction supervision, but also for managing the execution of asset strategy.

Unlike equity managers, who research companies and manage the probabilities that they can execute their articulated strategies, real estate managers must help define and execute on property-level opportunities.  So, real estate asset management, unlike traditional asset management, requires experienced individuals who can optimize the value of properties through superior transaction and management execution.  In fact, in many ways, a real estate asset manager is a lot like a company CEO.

Portfolio management firms often rated by their ability to ensure appropriate risk-adjusted returns and portfolio diversification through superior asset allocation and selection.

In addition, real estate portfolio management firms provide value to clients by ensuring the most efficient use of investor capital, and by keeping clients informed through superior performance measurement, and even cash flow forecasting.  With the exception of real estate investment trust (REIT) and fund of fund managers (whose performance is judged by the ability to gauge other managers' ability to design and execute strategy), the real estate equity fund manager is in essence the CEO of his or her own company, creating and executing property-level strategies for the assets under his or her charge.

The real estate asset management function is made up of property level specialists who add value to fund managers by executing property-level strategy. These types of management firms can also help with real estate investment trusts. The specialists are experts in either regional market fundamentals or in specific property types, and are responsible for optimizing the value of the assets in their custody. In addition to providing portfolio management information on local prospects and facilitating transactions, the asset manager is responsible for property-level performance.

In addition to approving budgets and performing expense management, asset managers increase value by managing the leasing at one or more properties.  Although it may seem like a black-and-white affair, leasing is a complex function that inevitably decides property and portfolio value.  Success in leasing is not only attained by finding and executing the highest possible leasing opportunities at each property, but also by conducting a leasing program that aligns with portfolio strategy while maintaining the best relations with existing tenants.

Leasing is a highly negotiated process, which can involve making decisions at odds with tenant needs in order to optimize your real estate values.  For example, for properties that are slated for sale, leasing might be suspended during a sales period to allow new owners to factor higher potential leasing rates. This can lead to increased forecasted property values, and therefore higher sales offers.

During periods of rising rental rates, long-term leases may be locked in for income-oriented properties, while for strategies focused on capital appreciation, lease terms may be shortened to take advantage of higher expected rates in the future.  The asset manager's ability to accomplish the appropriate tenant mix, execute leasing strategy that aligns cash flows with portfolio needs, and manage both capital and operating expenses can significantly affect overall portfolio value.

In real estate equity funds, there is an inherent conflict between portfolio management firms and their asset managers, since they work for somewhat divergent goals.  While asset managers are specialists compensated for optimizing the value of their properties and portfolio managers are generalists rewarded for optimizing portfolio return, investor satisfaction and how to invest your money properly, the successful real estate fund manager is one that can manage this conflict and maintain an efficient management team and portfolio performance.  This requires articulating a well-designed portfolio strategy within a well connected team of managers who understand and have internalized the overall investment objectives.  This can be a difficult task for any fund that has significantly increased the number and complexity of properties under management.

It is also critical that real estate portfolio management firms not only embody the requisite capital allocation, property selection and other investment skills required, but also that they have the ability to create appropriate investment strategies and the leadership skills to mobilize the organization toward the same portfolio mission.

To work with SWFL’s top rated real estate portfolio management firm, contact Asset Quest today at (239) 541-8448.