The term ‘asset management’ itself is often misunderstood within the real estate investment arena; it might refer to the management of financial assets or it might refer to the physical management of buildings. Within the real estate private equity (REPE) world it usually refers to the value-add management of an asset post investment.
The issue of accountability becomes complex in the Indian market where REPE investors primarily invest in ‘under-construction’ or development projects rather than simply acquiring completed buildings. Development risk is complicated. In India, there is also the added element of having to manage the relationship with the developer or landowner as most investments are in the form of ‘partnerships’. Thus the successful asset manager must also become a skilled ‘project manager’ and ‘relationship manager’.
Given the complexities, do REPE firms need to adapt the role of an asset manager to suit the Indian context? And, is this dynamic human capital available? Based on the successes and failures of foreign funds in Indian real estate, the answer to the first question is a resounding, yes. Evidence also suggests that the traditional human capital asset manager does not exist. We believe that there is a viable solution. We first need to take a macro look at the REPE industry in India to view this issue contextually.
Probably the biggest challenge REPE investors in India face is finding and managing a trustworthy development partner. Most REPE investors made their returns on the land value and therefore the active value-add asset management was less of a priority. As land values continue to increase and margins tighten, generating added value from any investment becomes vital.
Due to the immaturity of the Indian REPE market, there is very little asset management talent available. To overcome this, most funds have forced their investment / acquisition managers to act as asset managers. This strategy can be a waste of investment talent and may also create an unhappy workforce, thereby placing investment managers in jobs for which very few have any technical real estate qualifications. One senior investor believes that “if investors are able to train their investment staff to better understand the development process and are willing to go through a steep learning process then they will end up with a better skilled investment team who are in turn better placed to make good, solid investments (and exits) in the Indian real estate sector”. The involvement of a skilled technical ‘support’ team consisting of development and project managers will decrease the chance of errors.
This ‘support’ team should also carry out much of the on-site leg-work, thus preventing the investment manager from becoming bogged down with routine audits and operational troubleshooting. The investment manager can have more of a strategic approach to the asset management and exit. The traditional acquisition manager becomes the ‘relationship manager’ and remains accountable for his investment from acquisition to exit.
The reality is that while this ‘relationship and project manager’ model might work for straightforward or vanilla deals, the Indian market is highly complex and very often investments and joint ventures become too deeply entrenched in legal issues.
The solution is to build a team of varied skill-sets including:
- the traditional ‘hard core’ deal professional who is aggressively scouting for opportunities,
- the risk management professional who is able to build models and underwrite deals,
- and the real estate trained professional who is able to look at the technical aspect of an investment and manage the development process.
To try and find a team of cookie-cutter multi-skilled professionals is impossible (in any market) and thus a flexible, more collegiate model which has elements of linear and matrix structures is required. Surely an entrepreneurial, MBA qualified REPE fund CEO is capable of implementing such a structure.