Real estate equity portfolio or funds management differs radically from managing equity, bond or mutual funds in that real estate managers are not only responsible for asset allocation, risk management and transaction supervision, but also for managing the execution of asset strategy.
Unlike equity managers, who research companies and manage the probabilities that they can execute their articulated strategies, real estate managers must help define and execute on property-level opportunities. So, real estate asset management, unlike traditional asset management, requires experienced individuals who can optimize the value of properties through superior transaction and management execution. In fact, in many ways, a real estate asset manager is a lot like a company CEO.
Think a career in real estate portfolio management might be right for you? Read on to learn more about this career.
Real Estate Portfolio Management
The training and experience gained by real estate equity managers is similar to that of other fund managers. However, it is dissimilar in the manner in which they use those skills to ensure portfolio performance. Portfolio managers are often rated by their ability to ensure appropriate risk-adjusted returns and portfolio diversification through superior asset allocation and selection.
In addition, real estate portfolio managers provide value to clients by ensuring the most efficient use of investor capital, and by keeping clients informed through superior performance measurement, and even cash flow forecasting. With the exception of real estate investment trust (REIT) and fund of fund managers (whose performance is judged by the ability to gauge other managers' ability to design and execute strategy), the real estate equity fund manager is in essence the CEO of his or her own company, creating and executing property-level strategies for the assets under his or her charge.
Investment Selection Strategies
Real estate portfolio managers conduct asset allocation and asset selection, not by understanding the market dynamics and companies in specific industries, but by being experts in real estate property fundamentals. They study within local regions and in the different commercial land uses: office, industrial, hotel, retail, and single and multifamily residential). To beat the market, ensure diversification and produce adequate risk-adjusted returns, real estate portfolio managers must make bets on regional or local property markets and, in the case of multiple-asset portfolios, the correct property mix.
For this reason, many fund managers focus on specific regions or property types; some larger real estate asset managers organize their senior employees and support personnel by region or land use. The rationale for organizing in this way is to ensure that market opportunities can be identified and then translated into the correct property selection and asset origination. The manner in which properties are acquired is one of the most significant ways that real estate funds differ from more traditional investments. Like traders on the stock market floor, real estate funds use acquisition specialists to uncover and execute property transactions. These acquisition personnel usually work for a specific fund or are organized regionally or by asset type.
Given that most real estate equity funds own all (or a significant portion) of each property, portfolio managers are often directly involved in the acquisition process. Having the responsibility to set and execute property strategy, portfolio managers must be directly involved with all investment processes including acquisitions, financing, dispositions and property-level decision making. In order to facilitate the breadth and depth of real estate investment management processes, portfolio managers must rely on a sizable amount of infrastructure in relation to capital invested. In order to accomplish this as efficiently as possible, real estate equity fund managers and asset managers have developed a specialized asset management function.
Real Estate Asset Management - How It Works
The real estate asset management function is made up of property level specialists who add value to fund managers by executing property-level strategy. The specialists are experts in either regional market fundamentals or in specific property types, and are responsible for optimizing the value of the assets in their custody. In addition to providing portfolio management information on local prospects and facilitating transactions, the asset manager is responsible for property-level performance.
In addition to approving budgets and performing expense management, asset managers increase value by managing the leasing at one or more properties. Although it may seem like a black-and-white affair, leasing is a complex function that inevitably decides property and portfolio value. Success in leasing is not only attained by finding and executing the highest possible leasing opportunities at each property, but also by conducting a leasing program that aligns with portfolio strategy while maintaining the best relations with existing tenants.
Leasing is a highly negotiated process, which can involve making decisions at odds with tenant needs in order to optimize the value of the property. For example, for properties that are slated for sale, leasing might be suspended during a sales period to allow new owners to factor higher potential leasing rates. This can lead to increased forecasted property values, and therefore higher sales offers.
During periods of rising rental rates, long-term leases may be locked in for income-oriented properties, while for strategies focused on capital appreciation, lease terms may be shortened to take advantage of higher expected rates in the future. The asset manager's ability to accomplish the appropriate tenant mix, execute leasing strategy that aligns cash flows with portfolio needs, and manage both capital and operating expenses can significantly affect overall portfolio value.
Real Estate Portfolio Managers as CEOs
If one thinks of a property as a separate company or subsidiary, each with its own strategy and performance potential, one begins to understand why real estate equity portfolio managers are much like corporate CEOs. Like CEOs, who must allocate a limited supply of capital among various opportunities to create the greatest overall return on investment, real estate portfolio managers do the same across the properties they manage. This need to apportion a constrained amount of resources creates a situation different from many conventional asset management firms.
In real estate equity funds, there is an inherent conflict between portfolio managers and their asset managers, since they work for somewhat divergent goals. While asset managers are specialists compensated for optimizing the value of their properties and portfolio managers are generalists rewarded for optimizing portfolio return and investor satisfaction, the successful real estate fund manager is one that can manage this conflict and maintain an efficient management team and portfolio performance. This requires articulating a well-designed portfolio strategy within a well connected team of managers who understand and have internalized the overall investment objectives. This can be a difficult task for any fund that has significantly increased the number and complexity of properties under management.
It is also critical that real estate portfolio managers not only embody the requisite capital allocation, property selection and other investment skills required, but also that they have the ability to create appropriate investment strategies and the leadership skills to mobilize the organization toward the same portfolio mission.
When it comes to real estate funds, management's ability to execute asset management plans in addition to performing more traditional fund management practices is key. As a real estate investment manager, this means optimizing the value of the properties in his or her portfolio, both through the selection and subsequent management of the portfolio's real estate assets. Real estate portfolio managers must allocate their resources over the properties they manager for the greatest possible return, and keep their team on track to accomplish the same. For those with the right mix of skills, this career stands out as a unique opportunity in asset management.
Mutual Funds & ETFsFrom REITs to owning your own home, find out how diversify your portfolio with real estate assets.
Investing BasicsExposure to different asset classes is required to generate income, reduce risk and beat inflation. Find out how bonds can help.
Home & AutoOwning property isn't always easy, but there are plenty of perks. Find out how to buy in.
InvestingAfter October’s better-than-expected employment report, a December Federal Reserve (Fed) liftoff is looking more likely than it was earlier this fall.
InvestingWhile stocks have rallied since the economic recovery in 2009, many active portfolio managers have struggled to deliver investor returns in excess.
RetirementWe discuss the advantages of seeking professional help when it comes to managing our retirement account.
RetirementExplain how to use an IRA account to buy investment property.
ProfessionalsLearn what a typical early morning to late evening workday for a hedge fund manager consists of and looks like from beginning to end.
Home & AutoLearn how to find suitably priced rental property and the right rent level. Determine what maintenance costs to expect and what tax breaks are available.
Investing BasicsA diversified portfolio will protect you in a tough market. Get some solid tips here!
Hedge funds can trade penny stocks. In fact, hedge funds can trade in just about any type of security, including medium- ... Read Full Answer >>
Mutual fund investors have numerous items to consider when selecting a fund, including investment style, sector focus, operating ... Read Full Answer >>
Generating returns that exceed those provided by the broader market is the goal of nearly every investor. However, the methods ... Read Full Answer >>
Financial advisors dislike target-date funds because these funds tend to charge high fees and have limited histories. It ... Read Full Answer >>
A hedge fund manager does not necessarily need any specific license to operate a fund, but depending on the type of investments ... Read Full Answer >>
Mutual funds are legally allowed to invest in hedge funds. However, hedge funds and mutual funds have striking differences ... Read Full Answer >>