The growth of operational real estate (OpRE) is one of the most significant recent trends in global real estate markets. OpRE is relevant to a wide range of real estate asset classes and subsectors, and an increasing number of diverse investors are attracted to the strategy.
Compared with traditional real estate investment strategies, OpRE has historically been considered higher risk because the investments are more complex and often opportunistic, but a key driver for investors is the potential for higher returns on invested capital because the investor assumes more of the operational risk.
Success depends on selecting the right investment model for OpRE assets, given investors’ objectives and sector dynamics. Some models simply link lease rates to operational performance, and investors have virtually no role in running the operations of the underlying real estate asset. Other models enable comprehensive management of the operations. Most lie somewhere between these two poles, with investors taking some role in operations, whether directly or through a third-party specialist operator.
Below we review the investment models that private equity real estate investors typically use for their OpRE investments. We also highlight some key drivers and determinants that affect which model investors select, and we provide some guidance on which models are used most often by sector.
OPERATING MODELS
In the following sections, we show typical configurations for integrated, third-party, and franchise models, with some variation in each.
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