Building a New Real Estate Investment Information Model to Support Investors and Investment Managers
By David Stanford and John D'Angelo
[Reprinted with permission from the May 2011 issue of The Institutional Real Estate Letter - Asia Pacific.]
Copyright ©2011 by Institutional Real Estate, Inc. Material may not be reproduced in whole or in part without the express written permission of the publisher.
Significant change has swept the commercial real estate sector in recent years. Over time, larger volumes of capital from a variety of institutional sources have moved into the industry, and real estate truly emerged as an acceptable risk-managed asset class. As real estate assets under management grew, investors devised new strategies and extended their portfolios to new geographic regions, untapped sectors and new investment vehicles.
For investors and investment managers, the sheer size and breadth of those investment portfolios significantly increased the complexity of operations, the search for greater transparency and the need for more robust risk management — pressures that were building even before the impact of the global financial crisis.
When that financial event hit, investors the world over realized the inadequacy of available information, a lack of reliable processes, and the weakness of many of the information systems used to monitor, analyze and govern those vast investment portfolios. In the wake of the financial crisis, institutional investors and their investment managers are seeking a more complete and structured way to manage the people, process and technology in the crucial commercial real estate information supply chain.
Investors and managers now recognize the need for an effective real estate investor information model. The optimal approach should establish consistent and reliable data on counterparties and provide comprehensive visibility into even the most complex portfolios. This new thought model should improve workflows and support more frequent evaluations, while freeing staff to focus on value-added activities such as proactive analytics.
Most of all, commercial real estate investors and managers need an information model that better protects capital and drives superior risk-adjusted returns. The end goal is to empower investors to make more informed investment decisions, operate more effectively and profit more consistently in today’s global marketplace.
DRIVERS SHAPING THE NEED
Large amounts of new institutional capital have been invested in real estate during the past decade. This institutional investment has taken several forms, including direct equity, public equity vehicles, joint ventures and platform investments in various forms or vehicles, various types of real estate debt, and commingled fund investments. As the volume of capital flowing into real estate investments has grown, the variety of investment vehicles has expanded, with some institutional investors holding assets in a growing array of forms and vehicles.
Investors and investment managers need transparency to understand their risks and their portfolios. Both the good news and the bad must be communicated in a timely and accurate way. Investors who have traditionally functioned as portfolio allocators must now drill down to see and understand details below the top-level aggregated data. For those that do not have offices in their invested locations, this can be a real challenge.
Both the institutional investor and the investment manager need access to aggregated lease data, and the ability to analyze at the aggregated lease/asset level according to portfolio allocation targets. The need to monitor and understand risk was clearly highlighted in the past cycle, when national tenants and entire sectors of corporate occupiers found themselves in financial difficulties or outright bankruptcy. As players at every level scrambled to understand the impact of events and potential scenarios on their portfolios, they realized the serious shortcomings in their underlying data and the tools used to access that data.
In the best cases, tenant data was captured, Standard Industrial Classification (SIC) and North American Industrial Classification System (NAICS) codes were accurate, tenant names were consistent across all leases, and analysts could trust lease-level abstracted information to be complete and reliable. In the worst cases, none of this was true. To our knowledge, virtually no organization experienced the best case. In fact, when most investor or management organizations attempted to assess single-tenant or sector-wide risk, they encountered a process that was laborious, time consuming and non-repeatable — and that highlighted the weaknesses in their organizations, operations and systems.
At the top of the capital stack — for institutional real estate investors — most analytic data is partially or wholly owned by others. For investments in commingled funds, granular lease-level details were held by investment managers, and that information was seldom available to institutional investors. Complete, trustworthy and granular data on underlying assets is more easily obtained for direct equity investments but is more difficult to get the farther one gets from wholly owned direct equity investments.
Yet few can doubt that both investors and investment managers need a more reliable way to capture, store and leverage key information on complex and far-flung portfolios.
A NEW DATA FRAMEWORK
To address these challenges, RealFoundations has developed a real estate investment information model (RIIM*) that consists of seven key components (see “The Real Estate Investment Information Model,” below). It is in essence a structured approach to monitoring and managing performance, identifying opportunities, enforcing policies and understanding risk at various levels, including the portfolio as a whole. Investors and managers can leverage this model to:
- Better understand and articulate their data requirements;
- Identify internal and external data sources;
- Spot developing trends or deviations from their risk/ allocation matrix;
- Create a structured, reliable and repeatable mechanism to locate and move required data from external sources;
- Ensure that the data is accurate, complete and reliable;
- Store information in a logical, structured way; and
- Build the tools and access needed to perform reporting and analysis.
Often, organizations must also adjust their approach to how external data is requested, moved, captured, retained and analyzed by investors and investment managers.
As shown in the table below, the RIIM requires not only tools and technologies, but also dedicated resources and processes. This new model encompasses data governance and performance metrics, a consistent data model, applications to capture and manage data, processes and controls, data movement, and the larger information supply chain.
|The Real Estate Investment Information Model (RIIM)|
|Data Governance||Principles and operation model to ensure the reliability, accuracy, consistency and timeliness of the information necessary to monitor and manage investments and activities.|
|Performance Metrics||The set of summarizations and/or calculations measuring investment activity and used to monitor whether an investment place is meeting expectations, whether there are new opportunities to capture additional investment value and whether related risk is identified, understood, mitigated and appropriately compensated/rewarded.|
|Data Model||Model comprises essential data elements needed to aggregate and calculate the Performing Metrics and the depiction of the appropriate level of granularity and interrelationship among the elements.|
|Application Stack||Description of the set of applications needed to capture, transport, transition, store and report data required to support core business processes and deliver performance metrics.|
|Data Movement||Guidelines, activities and tools for the acquisition and reception of external data and its orderly movement through the application stack.|
|Processes and Controls||Description of the processes necessary to receive, validate, store and publish data to support performance monitoring and information analysis.|
|Information Supply Chain||Depiction of the network of source data information suppliers (service providers and counterparties) and the associated method, frequency and quality of their information provisions.|
CURRENT STATE OF AFFAIRS
A number of current market realities are driving the need for a real estate investment information model.
While 100 percent direct equity investments are fairly advanced and allow owners to quickly gather needed information about a given asset, joint venture investment arrangements (particularly where the joint venture partner manages the property) can make it more difficult for more distant partners to gather timely and granular data on the many variables that can affect assets within a portfolio. In fact, the farther away from direct ownership an investor is from the real estate asset, the more difficult it becomes to gather and integrate information.
As real estate has grown as an accepted institutional investment asset class, and as more money and new players have entered the marketplace, visibility into many aspects of portfolios has become, if anything, less clear.
As we have seen, it is often difficult to get information up and down the value chain, and that difficulty can result in serious data governance, compliance and risk management issues. More complex, attenuated ownership and management structures accentuate this problem.
This market dynamic often produces an almost adversarial standoff between the holders of data and the investors or managers who consume that information. When you add the problem of inconsistent data definitions, a lack of common governance structures, and disagreement on calculations even within organizations, the problem becomes increasingly acute.
To fully realize the promise of the RIIM, real estate investors and investment managers must address several critical issues.
One is the concept of the information supply chain. As the name implies, the information supply chain recognizes the partner relationship between fee property managers, construction managers and general contractors, joint venture partners, internal parties in an asset management arm, and others who create information outside of the investor or investment manager organization.
Historically, the relationship between the party requesting information and the party supplying data has been, at best, strained, even though supplying partners are often perfectly willing and/or contractually obligated to supply that information. Multiple and uncoordinated data requests can originate from various parts of a top-of-the-chain organization, and those requests often lack the clarity and specificity needed to ensure a fast, granular and properly formatted response. As a result, both the requesting and sending parties are frustrated by this less-than-optimal process.
A well-designed information supply chain starts by recognizing external data suppliers as partners rather than adversaries, and provides the time, attention and technical support needed to ensure a smoother flow of information requests, extraction and response. It then consolidates external data into a single flow, driven by consistent and specific data requests, and provides ongoing assistance as conditions change.
Another often-missing ingredient is data governance — or an approach that determines and records the definition of essential data elements, who owns that data, the system recognized as the “single source of the truth,” a range of expected values for each data element, and the processes that ensure vital data is cleansed and maintained on a regular basis. The need for data governance has been understood and accepted in most industries, and given the critical need for consistent and precise information in the real estate sector, it comes as no surprise that investors and investment managers increasingly expect and demand robust data governance.
For the RIIM to be effective, data governance must be in place to ensure consistency and commonality of data definitions, requests and communications throughout the supply chain. Once established and provided with resources, a reliable data governance program ensures that submitted data conforms to expectations, that values outside of expected norms are flagged and reviewed, and that the entire data set is reviewed for exceptions. With a robust data governance regimen in place, investors and investment managers can stop spending time searching for and validating information. Instead, they can trust incoming data and focus their time and resources on more strategic, value-building activities.
For the RIIM to be fully and effectively implemented, organizations also must create and implement a single, shared and accepted set of performance metrics and measures. While this seems simple and obvious, in many organizations the values used to calculate net operating income or FFO (funds from operations) can vary from region to region, portfolio to portfolio, department to department, and even desktop to desktop. When data that is assumed to be comparable is in fact not comparable, variations can and do negatively affect the integrity of the resulting business decisions. Once a single catalog of measures and metrics is defined, data governance is used to maintain and manage those definitions to meet specific business, product and geographic requirements.
Illustrative Data Flow Model
When considering this next-generation investment information model, real estate organizations must address several crucial deployment variables in order for the RIIM to provide the desired comprehensive, integrated platform that will meet the information needs of active real estate investors and investment managers. This model addresses the tools, technologies, behaviors, processes and procedures needed to ensure that required data is available to both analysts and decision makers.
Depending on the starting point for a given organization, deploying a real estate–oriented information model can appear to be a daunting task. But a RIIM approach does not need to be implemented in a wholesale fashion. While there are certain elements of the RIIM that should be considered foundational, this model can be implemented in phases. Even in the end-state, a given organization does not necessarily need to automate the entire platform.
The most important ingredients at a foundation level are:
- Enterprise agreement about data definitions, measures and metrics — getting the entire enterprise on the same page about what data is critical, how it’s going to be used, who owns it, where it comes from, and how it should be defined;
- A data governance program that is comprehensive and adequately provided with resources to record all data-related decisions, enforce them, effectively communicate them to information supply chain partners, and ensure that the enterprise real estate investment data is complete, accurate and reliable; and
- A shift in thinking within the enterprise from a conflict-laden tug-of-war with external information suppliers to a partnership in which the investor or investment manager works with those who create information to make sure they understand information requests, that those information requests are controlled and rational, and that the task of extracting data from supply chain partner systems doesn’t fall entirely on the shoulders of the supply chain partner.
Once an organization has addressed these foundational elements, there are a number of ways in which a phased RIIM implementation might be structured. Deployment, of course, should be based on the needs and priorities of the investor or investment management.
For most organizations, a logical starting point is an honest assessment of the areas of greatest risk exposure or greatest waste of human capital. Ask yourself where you stand in relation to the three foundational elements noted above and use the RIIM structure as a checklist against what you currently have in place. Then evaluate how much time your organization spends on non-value-added but necessary tasks such as chasing down information, validating information to ensure it can be trusted, manipulating information to be comparable and consistent, and loading information into a tool for analysis or reporting.
Once you have established organizational needs and priorities, you can get a sense of both your readiness to implement the RIIM, what elements may be in place, and which components would deliver the greatest return on your investment.
THE BOTTOM LINE
Given the size, complexity and dynamics of today’s commercial real estate portfolios, investors and investment managers can no longer rely on manual or outdated information models. To avoid repeating mistakes of the past, real estate organizations would be well advised to adopt an improved and superior information model, one that allows real estate organizations to increase transparency, better leverage internal knowledge and external market intelligence, reduce overall risk, and make better investment decisions. Robust data governance allows organizations to maximize the return on both human capital and technology investments. A RIIM can be deployed to achieve greater efficiencies, to react more quickly to market changes, and to spot developing trends and stay ahead of competitors.
The alternative — not having a robust and comprehensive information model — exposes any commercial real estate investor to substantial downside risk. Without a reliable way to gather, manage and analyze data, organizations invariably spend far too much time and money on manual information management. They tend to miss key deadlines or fail to see and exploit opportunities. Worse, because they lack visibility and insight, their portfolios are continually exposed to unknown and unnecessary risk.
The bottom line is: If you do have a solid handle on the information supply chain — ensuring your data is timely, relevant and consistent across your portfolio — then you will know more about the operations, risk exposure and market characteristics of those assets.
When you know more, you can make better investment decisions. You have lower exposure and fewer unpleasant surprises. And you are better able to find and pursue emerging opportunities across portfolios, businesses and the global commercial real estate marketplace.
* RIIM is a registered trademark.
For additional information, please contact
David Stanford Executive Director
+1 (214) 292 7028
+1 (646) 825 7982