‘From problem child to value driver: Creating new perspectives with clever strategies’
Chapter 2 of the 6-part series “REAL ESTATE STRATEGY 2025+: REVITALIZATION, REPOSITIONING, SECURING THE FUTURE”
Not every property is a sure-fire success. Particularly in institutional portfolios, there are always properties that do not meet economic expectations – whether due to structural weaknesses, changed location conditions or external market developments. These so-called “problem properties” present many investors with difficult decisions: Complete renovation and repositioning, invest minimally and rent, rededicate, sell or even depreciate at low prices?
However, it is not uncommon for such decisions to be postponed – whether out of the hope (or assessment) that temporary challenges will be resolved over time, or simply due to a lack of management capacity. In many organizations, there is a lack of a clear process or resources to systematically deal with such objects. As a result, problem properties languish in the stock for years without receiving the necessary attention and a real perspective for the future.
In this chapter, we shed light on typical weaknesses, analyze sensible options for action and provide initial insights into success strategies from practice.
Typical weaknesses: vacancy, unattractive rental structure, ESG deficits
The causes of underperformance are manifold, but certain patterns can be identified:
-
- Vacancies & space inefficiency:Inflexible or oversized space concepts no longer meet today’s needs. High vacancy rates and a lack of flexibility in the use of space are putting a strain on profitability.
- Outdated rental structure: poor leases with tenants with poor credit ratings, inadequate indexation clauses or excessive dependence on individual users increase the risk of default and make active management more difficult.
- ESG weaknesses:Outdated building technology, poor energy performance indicators or a lack of transparency with regard to social and governance criteria lead to valuation losses – both regulatory and market-based.
- Location shifts:What was considered an up-and-coming district ten years ago may have fallen significantly behind in the favor of tenants and investors today. A lack of infrastructure or changed user behavior can devalue locations.
- Management deficits: inadequate budgeting, lack of cost monitoring or inadequate control of local service providers are just a few examples of weak management that erodes the performance of properties in the medium term.
When is revitalization worthwhile – and when not?
Not every property can be saved – but many can. The art lies in the realistic assessment of potential and effort. Decisive factors are:
- Location and demand situation:Is there a realistic target group for the area? How strong is the competition, how dynamic is the local market?
- Structural & technical substance:Can the property be technically converted into a marketable condition – and at what price?
- Regulatory framework:What ESG requirements must be met? Are there any requirements or restrictions due to monument protection, development plans, etc.?
- Marketing perspective:Is it possible to reposition with attractive tenants and realistic rent levels? What role do third places, hybrid use or ESG-compliant mobility services play?
The revitalization is worthwhile if the CapEx is in a reasonable ratio to the expected cash flow growth or exit value – and if this improves the risk profile of the property in the portfolio.
Real-world success stories: How GalCap is repositioning real estate
In recent months, GalCap Europe has taken over the asset management of various properties at several locations in Europe with the aim of carrying out a value-creating revitalization. The problem properties include office buildings and mixed-use properties.
Three aspects are crucial for success:
- Early potential analysis:Each property is checked for weaknesses and potentials through a standardized screening – from ESG risks to the rental structure. Particular attention is paid to the individual strengths of the property: Which structural or infrastructural USPs can be specifically worked out and used strategically?
- Holistic repositioning approach:Starting with a concept and strategy development that brings ambitious goals into a tight time and action plan, the “big picture” is seen. Technical, conceptual and economic measures are intertwined – flanked by targeted communication and marketing. This also includes the personal approach to all tenants by the responsible asset manager: What works well? What needs to be improved? What is particularly important for tenants? At the same time, existing service contracts are reviewed, the service profile is adjusted if necessary and – if necessary – re-tendered. The operating cost structure is also critically analyzed: The so-called “second rent” is examined for cost drivers and continuously reduced in the further course.
- Target group focus:Instead of relying on classic universal strategies, each property is set up in such a way that it offers added value for a clearly defined group of tenants – be it through furnishings, price, services or location quality. The marketing is set up from scratch: A new storyline, fresh brand identity and a specifically selected circle of brokers ensure new attention in the market. In many cases, a showroom is also set up to give potential tenants on site a concrete impression of what their future office could look like. Additional features such as accessibility, bicycle storage rooms with shower facilities or a shared reception area further enhance the property and contribute to its repositioning.
Experience shows that successful revitalisation is not a product of chance, but the result of well-founded analysis, professional planning and consistent implementation. The focus is not on impressive individual measures, but on a structured, targeted approach – from technical upgrades to market-driven remarketing to the establishment of long-term sustainable usage concepts. The patience that is sometimes necessary for implementation is often underestimated. While the first steps are still full of initial euphoria, motivation dwindles more frequently in the further episode. Especially when unforeseen difficulties arise, perseverance is required.
Result
Problem properties are not fate – but a question of approach. Institutional investors who identify their weak assets in good time and systematically analyse them can leverage new values through targeted measures. The prerequisite is the will to actively deal with the causes and to get the right partners on board for planning and implementation at an early stage. External support – such as that offered by specialized partners such as GalCap Europe – can be decisive if there is a lack of either the personnel capacities or the necessary know-how in-house to analyze, manage and revitalize challenging properties in a targeted manner.
The third chapter of our white paper is about how portfolios can be further developed in a targeted manner by adding future-proof asset classes – as a strategic addition to the revitalization of the portfolio.
