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Designing smarter real estate portfolios in times of uncertainty

Salah Sahyoun/Dubai
Filed on January 21, 2020

(KT file)

In times of uncertainty, maintaining functional and efficient real estate is key. This is made more crucial nowadays in light of the fast-paced advances in technologies and evolving consumer behaviors disrupting all aspects of real estate. From these stems the need to develop proactive strategies that focus on increasing the value of your real estate portfolio and generate annual and recurrent cash flows.

Obstacles to achieving the optimal performance of real estate portfolios are varied. Within the region, industry players have held onto large land banks, most of which are undeveloped and situated in tertiary locations. To develop the necessary infrastructure and supporting amenities requires additional financing and time. In some instances, the larger pieces of land have taken longer time to sell and have therefore depreciated in value.

In addition, given the traditional nature of doing business which relied on family businesses or holding companies, real estate was not considered a core function of the company. Therefore, formulating and developing appropriate strategies, let alone making real estate decisions, has been complex. This is made more difficult by the limited availability of market wide and asset specific data, making it more challenging to understand and manage the property effectively.

On a general level, one of the key considerations to ensure your real estate portfolio's profitability is being able to anticipate future market conditions. 'Future-proofing' your portfolio will allow for the flexibility needed when responding to uncertain market conditions.

Much of this rests on having timely, accurate, and reliable data that can be harnessed for actionable insights. This includes real-time data and long-term market forecasts on macroeconomic and demographic indicators, market performance, and property performance. Connecting these data points together will assist in predicting future market directions more accurately.

On a more granular level, a key strategy to overcoming uncertainty is diversifying your portfolio. When the number of uncorrelated assets in a portfolio increases, the variance of the portfolio, in other words the risk, decreases.

Traditionally, Middle Eastern investors have been risk-averse, investing in more stable locations and asset classes such as offices, hotels, and retail centers. However given recent market conditions, we see investors moving up the risk curve and diversifying their portfolios by incorporating alternative assets such as industrial properties. Data shows that Middle East investors spent more on industrial and logistics facilities ($315 million) than on retail malls ($155 million) in the first half of 2019.

To unlock the full potential of your property portfolio it is also imperative to reduce costs through proactive property and asset management. Unlike other investments, investing in real estate means you can actively manage each of your assets including regular maintenance, tenant and lease management, improvements to efficiency and productivity, among other elements. This ensures the asset's longevity and increases the return on investment.

Beyond closely managing and diversifying your real estate assets, employing structured real estate financing solutions, other than the traditional model of relying on bank lending, will allow your portfolio to grow even in uncertain times. This may include mezzanine debt financing versus equity, sponsorship and joint-ventures, peer-to-peer lending, and specialised portfolio loans.

In order to optimize your portfolio value, minimise risk and maximise returns, a strategic action plan incorporating the above will need to be developed. Ideally this aligns expectations from your real estate with the wider business needs and objectives.

A key initial step is evaluating the current portfolio and understanding any budgetary or resource constraints to expansion and diversification. This includes identifying sources of finance for future developments. From there emerges the need to establish a long-term goal and identify and prioritize opportunities that ensure portfolio diversification.

Once in place, developing a plan based on a set of measurable action points, development timelines, and processes is crucial. The final stages are implementation and continued evaluation and improvements under a proactive property and asset management strategy. Ultimately, this will ensure a continuous revenue stream and an increase in the overall value of your portfolio.

- Salah Sahyoun is a senior director, Strategic Consulting at JLL MENA. Views expressed here are his own and do not reflect newspaper's policy.



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