Investing in commercial real estate
I never thought I would see the day that meeting up with more than six people in a room would be a rarity. I am now looking fondly back on all the events I attended last year and was able to learn so much from. One such event was SEO’s ‘Third Tuesday’, hosted each month to share insight into a particular industry topic with SEO alumni. This time it was hosted by Weil, Gotshal & Manges and I was able to head over to their offices in the evening after work. There was an expert panel, who were all keen to share their experiences and encourage us all to get smarter in our thinking about the real estate business:
- Paul Pritchard – Associate Director, Tristan Capital Partners
- Chris Manske – Acquisitions, Heitman
- David Gorleku – Private Equity, Actis (SEO Alumni – now working at Blackstone)
- Ana Estrada – Merchant Banking MD, Goldman Sachs
The panel was moderated excellently as always by Andrew Fairbairn (CEO at SEO). He posed his own questions and then opened the floor up to the wider audience at the end. As you may or may not know, I have an unhealthy obsession for all things residential and commercial real estate, so I was excited to learn more. Real estate is among the oldest and most traditional of businesses, yet it is constantly re-inventing itself to track changes in financial markets, business models, political developments, new technologies, customer requirements, and increasingly – climate change. All this re-invention has created space for market participants with creative operating models (e.g. shared workspace, managed space), asset types (e.g. data centres, student housing), financial structures (e.g. CMBS, REITS, Private Equity) and more.
So what were the key takeaways?
1.How do we define real estate ?
- PP: Infrastructure, office, retail, logistics – you get some sort of cash flow return as well as capital growth at some point. Investing capital to get something back through occupiers paying you rent. There are lots of trends around space and service and that has always been a core part of real estate.
- DG: Using assets to create institutional cash flows to sell on to investors.
2.How does WeWork fit into all this?
- PP: WeWork have revolutionised how we use office space and their tenant interaction is completely different to the traditional model. They take on the risk of longer leases and then sub-let. Somehow the company is valued as a tech company even though they are pure real estate and basically act as an institutional landlord.
3.What part of the real estate universe is changing fastest?
- DG: Specialisation and expertise within asset classes is incredibly important. You could be a generalist more back then, but now the landscape has changed.
- CM: Human capital is key. It is not just about financial engineering, but truly understanding the asset class you operate in. You must find your niche – whether that is geographical or with regards to a particular asset class.
- AE: It is very competitive, interest rates have been low and being able to make above average returns has not been easy. Better management is needed, aggregating stuff to make a scaled business requires a lot of work. We are currently working on creating a platform of senior living spaces. Our entrepreneurialism is on a level we have never reached in the past. To do this we work with operating partners who are the executors for concepts and create management teams to support.
- DG: Local operating partners are key for every single market as they all have their own requirements legally – local knowledge is crucial.
4. Where does the capital you use to invest come from?
- PP: Tristan Capital clients used to be more US based but now we receive more capital from Far East Asia and the Middle East. Not so much the European market.
- CM: Now pretty much focused on Western Europe, with increasingly more from Asia and superannuation funds in Australia and other areas.
- AE: Mainly from Goldman Sachs’ balance sheet and over time we will be supplementing this with external capital as well.
5. How readily available is key data?
- PP & CM: It depends on what sort of property. Data points are important and there is a lot of data out there – being able to identify trends is crucial.
- DG: Across Africa it is much harder because in US the information is clear and accessible. This means there is also a lot of opportunity to add value in African transactions. One example is a big hotel that wanted to open in Morocco. There was not a lot of info about the Moroccan hotel market so our team stayed at all four and five star hotels in the area and got the best data in the market!
- AE: There is a massive market to create data sets in Southern Europe and Africa.
6. Is ESG important?
- Even though it is more expensive, it is absolutely imperative. Warehousing and logistics have become huge areas of focus across Asia.
7. What are the thresholds for a deal?
- PP: $25-50m.
- CM: $2m as part of aggregation.
- DG: In African markets we try to deploy at scale with a minimum $25m so generally $50-100 is the size for a strategy.
- AE: $300m.
8. What have been your favourite deals?
- PP: The small scale deals where we end up making a big impact.
- CM: Residential senior housing deals where people actually live and you get to see their happy smiles when you walk in.
- DG: The deals that have changed the face of a city. We did lots of deals in Harlem, when we first started we were the first private equity investors there. Now there are a lot of retail outlets and other amenities that have put the community first. In the African context there have been lots of rewarding deals.
- AE: The deals that are the most entrepreneurial and where something is created.
9. How does the industry approach diversity and inclusion?
- Real estate is an old boys club historically so trying to get in at university level is probably your best bet. There are gender focused associate recruiting programs at some firms.
10. What should I do if I want a job in this industry?
- Long-term internships are best and there is some lateral hiring that takes place. Opportunities exist at the junior level if you have a few years experience in banking or have done a relevant graduate school program. Show your interest by joining extracurricular activities like a real estate club and learn about a specific sector like student accommodation or hospitality.