The growth of operational real estate (OpRE) is one of the most significant recent trends in global real estate markets. OpRE is relevant across a wide range of real estate asset classes and subsectors, with an increasingly diverse range of investors attracted to the strategy.
OpRE has historically been considered riskier as the investments are often more complex and opportunistic compared to traditional real estate investment strategies, but the main driver for investors is the potential for higher returns on invested capital as investors take on more operational risk.
Selecting the right investment model for OpRE assets, taking into account investor objectives and sector trends, will determine success. Some models simply link lease rates to operating performance, with the investor having virtually no involvement in the management of the underlying real estate assets. Other models allow for full operational control. Most models fall somewhere between these two poles, with the investor playing some role in operations, either directly or through a third-party specialist operator.
Below we discuss the investment models commonly used by private equity real estate investors for their OpRE investments, highlighting the key drivers and determinants that influence the model investors choose, and also provide guidance on the most frequently used models by sector.
Operational Model
The following sections present common configurations for the integrated, third-party, and franchise models, with some variations on each.
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