Source: Goodwin —
The growth of the operational real estate (ORE) sector is one of the most significant recent trends in global real estate markets. ORE 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.
So what is ORE? Why is it attractive to owners and operators? And why is it attractive users and occupiers?
What is ORE?
The Investment Property Forum defines ORE as “a real estate investment where the return is directly and deliberately linked to the revenues and profits of the business conducted on or from the premises.”1 Whereas returns in traditional real estate investing usually depend mostly on leasing property to occupants or users, ORE investments tie returns to property operations.
Investment models can range from simply linking lease rates to operational performance, with virtually no participation in running operations, to fully managing the operations of the business that uses the underlying real estate asset. Most models lie somewhere between these two poles, with investors taking some role in operations, whether directly or through a third-party specialist team or platform (see below for details on specialist teams and platforms).
Compared with traditional real estate investment strategies, ORE has historically been considered higher risk because ORE investments are more complex and often opportunistic. But the potential for higher returns on invested capital can be significant.
Consider hotels as an example. ORE investments in the hotel sector depend on the ability of the operator to manage a complex and dynamic business, which involves a tenant base that turns over on a regular basis with volumes fluctuating based on seasonal and other factors. Revenue and costs structures can be incredibly dynamic, and operational expertise is critical to success.
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