Building successful real estate investment partnerships – the power of human capital

We very much enjoyed catching up with everyone at the GRI UK & Europe Reunion in London recently. We didn’t quite get the ‘we’re back baby!’ vibes from every room, but there was a calm and cautious optimism about real estate investment prospects pervading the delegation on the whole. 

There was also an impression of investors being ever more thoughtful and granular in their analyses and processes in choosing real assets and their specific strategy implemented to access them. One such strategy which enjoyed particularly lively and detailed discussions was the deployment of RE joint ventures, co-invests and club deals, and their various pros and cons in terms of accessing and adding value to investments. We thought we’d share some highlights and our own musings on them here.

The importance of expertise in real estate asset selection and strategy

These investment structures, which focus on marrying sophisticated capital resources and management expertise, have been around for a while, but they are becoming ever more popular, as competition to access investments and the race to scale intensifies. The management expertise element is obviously fundamental, but what ‘expertise’ looks like will depend on the specifics of the strategy in question. 

For example, a pan-European strategy needs to think about expertise in the most wholistic sense. Yes, detailed understanding and track record in the sectors and geographies in question, but also resources at genuine scale and an ability to create consistency of property brand and product despite that scale and disparity of location. For specific sectors which involve more intensive operation, such as healthcare or hospitality, selecting a partner with the ‘right’ expertise is even more crucial.

Seed and pipeline portfolios: partnership fundamentals

The general view is that having exclusivity over a seed asset or portfolio has also become a ‘must have’ for entry into new partnerships.  This is not only from the capital partner perspective of getting capital in play from day one, but also to give each party a sense of the other’s approach to underwriting, a fundamental area for alignment if genuine scale is to be achieved.

What appears to be tipping the balance for capital partners in choosing their managers is a clearly underwritten operator business plan with a meaningful pipeline of assets for the first substantive part of the investment period. This shows the necessary preparedness, granularity of thought and a drive to win that race to scale that institutional capital increasingly demands.

Aligning interests: Building trust and long-term relationships

Perhaps the discussion which elicited the strongest feeling was around the alignment of partners’ interests. It is clear that participants think the power of human capital is not to be underestimated, so understandably the idea that pervaded the room in this discussion was of capital and operating partners building relationships based on financial resources and professional skills and expertise. However, it was also well noted that the fundamental role of personal trust should not be forgotten.

For those relationships to have any chance of being genuinely long-term, each partner should be empathetic to the other’s particular circumstances. Specifically on the issue of alignment, what constitutes ‘skin in the game’ equity for each operator needs to be looked at in its specific context and, often times, with a proper understanding of the resources of individual managers involved. Be prepared to listen to your JV’s key personnel as to what alignment means to them so that, as true partners, you are prepared to shoulder the bad times together, just as you are ready to relish the good.

Transparency and communication: Key values for capital-operator partnerships

As we have come to know across the real estate landscape, the bad times do indeed come thick and fast sometimes and can strain even the strongest of capital-operator partnerships. Anecdotally, we hear that the ones which survive and indeed thrive are those that establish transparency and effective communication as core values, smoothing the path to creating that trust everyone is talking about. 

Balancing incentives: Stick vs. carrot approaches in real estate investments

Equally important is for investors to strike a subtle balance between each of the ‘stick’ and ‘carrot’ approaches to incentivisation. On the one hand, it is important to set default guardrails to guide operators alongside a detailed and clear business plan, but equally, over-focusing here can erode the partnership’s sense of common purpose and itself be disincentivising.

Commensurate packages of carried interest, promote shares or other similar incentives will also aid in driving performance but, more than this, establishing a relative equilibrium in terms of hurt money at stake will create a more aligned focus on the longevity of the platform. In striking these balances, it isn’t enough to just do your research and know your partner, you need to really listen to them and have eyes and ears wide open on the way in to each venture.

Needless to say, there’s no secret sauce for all this, but tap into the power of human capital and you should give yourself a fighting chance.

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