Magazine article Journal of Property Management

The Real Estate Decision Process

Magazine article Journal of Property Management

The Real Estate Decision Process

Article excerpt

Asset management is a hot topic among real estate professionals, discussed by many, but understood by relatively few. Because asset management is not a finite, stand-alone function and because asset managers' duties overlap, build upon, and complement those of other real estate professionals, questions persist regarding this growing area:

Why is there suddenly so much interest in asset management.? How does the asset manager differ from the property manager or the portfolio manager? How does he or she fit into the real estate investment scenario? These are not easily answered questions.

Changing real estate ownership

As the nature of real estate ownership has changed over the past 30 years, from predominantly individual to institutional, asset management has grown in importance. The shift in ownership orientation has, in turn, altered the way property owners acquire, sell, finance, and manage their properties.

While individual owners usually managed their assets directly, or perhaps hired other individuals - as opposed to organizations - to do so, institutional owners are by their nature distanced from the properties. This has created the need for communication channels between on-site management and institutional owners.

Evolution of the asset-manager role

As property managers became separate entities from property owners, and as managers' duties became more general, the need arose for an intermediary professional - one who would serve as the owner's coordinator of activities beyond property management, including financing, construction, and disposition. Thus the asset manager was born.

The asset manager is the key link between institutional owners and on-site management. He or she works with the numbers-oriented portfolio manager as well as the operations-oriented property manager, serving as an intermediary between the two.

The portfolio manager establishes investment strategies for the institutional owner and uses the asset manager as a conduit through which to communicate with the hands-on property manager, who is ultimately responsible for achieving the investment goals.

The asset manager also serves as the channel of communication from the property manager to the portfolio manager, filtering feedback in order to prevent the portfolio manager from receiving excessive and/or faulty information about investment performance.

Of course, in reality many additional consultants - including pension fund advisors, appraisers, bankers, attorneys, engineers, property vendors/contractors, and leasing agents - participate in the management of real estate investments. In addition, some institutional owners choose to limit the participants in real estate management while others work with onsite property managers as well. However, the decision-making chain described in the remainder of this article is a fairly typical one.

Real estate decision-making

The typical decision-making scenario for an institution investing in real estate involves many steps - from establishing risk profiles to task coordination - all interrelated. While there are as many investment management scenarios as there are investors, this model presents the most likely scenario, with the circles clearly showing the overlap of duties.

It should be remembered that every ownership of real estate is different, and it is the investor who sets the stage and designates the players. In some instances, the investor, the portfolio manager, and the asset manager, for example, are one and the same, and all their duties would be absorbed by that player. Thus, the circles are collapsible.

The decision-making process begins with the investor, who establishes long-term investment criteria based on actuarial projections and risk profiles created from information provided by actuaries and consultants.

The next step involves the investor and the portfolio manager At this level, investment objectives are established for the entire investment pool. …

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