‘From patchwork to strategy: How a sustainable portfolio is created from individual measures’
Chapter 5 of the 6-part series “REAL ESTATE STRATEGY 2025+: REVITALIZATION, REPOSITIONING, SECURING THE FUTURE”
Many institutional investors have long since recognised that selective measures – such as ESG optimisation of individual properties or the addition of new asset classes – are not sufficient on their own. What is needed is a comprehensive strategic transformation: away from a static portfolio to a dynamic, resilient portfolio that delivers reliable returns even in a volatile market environment.
However, such a portfolio transformation is not a quick fix, but a multi-layered, long-term process that requires planning, prioritization and perseverance. In this chapter, we show how this process can succeed, what factors need to be considered when developing a strategy, and how GalCap has supported institutional investors in realigning their portfolios.
The step-by-step restructuring of an institutional portfolio
- A successful transformation begins with an honest inventory: Where does the portfolio currently stand? Which objects will continue to fulfil their function in the future – and which will endanger the overall picture? This results in three central fields of action:
- Evaluation and categorization: Each property is examined on the basis of clear criteria – such as earning power, ESG compliance, demand situation and revitalisation potential. This results in categories such as “hold and optimise”, “strategically reposition” or “sell in perspective”. A special focus should be placed on those objects that are considered “core” today but have structural weaknesses. It is not uncommon for the core classification to be based solely on a long-term lease – while ESG deficits, location risks or a lack of third-party usability are ignored.
- Define target image: A future portfolio is modelled on the basis of individual risk preferences, sustainability goals and return requirements. This can include, for example, a higher proportion of residential, greater diversification across locations or a targeted addition of resilient asset classes.
- Implementation in stages: The transformation will not take place in one step, but in phased measures – for example through selective sales, targeted reinvestments, repositioning of existing assets or new investments in future markets. It is important to have a clear roadmap with intermediate targets and monitoring processes.
It is also important to critically question internal incentive structures. In many organizations, long-term risks are ignored by today’s decision-makers – assuming that the consequences will only affect their successors. This phenomenon – known as the principal-agent conflict – leads to preference for supposedly safe objects, even though they do not provide a sustainable performance basis when examined closely. Consistent portfolio management must therefore be professionally set up both in terms of content and structure.
Risk management: Which strategy suits which type of investor?
Not every model suits every investor. The trick is to develop an individual transformation strategy that meets the specific requirements and restrictions. A distinction must be made, for example:
- Security-oriented investors: Focus on stable returns, high ESG compliance, conservative growth. Here, the focus is on optimization and careful reallocation.
- Income-oriented investors: Willingness to take selective risks – e.g. via core+/value-add strategies or geographical diversification. Mixed transformation paths are available here, for example by combining the renovation of existing buildings with the purchase of future-proof properties.
- More flexible investors: Often higher degrees of freedom, but limited internal capacity. Here, a transformation can take place quickly and individually with external support – even via separate vehicles or club deals.
The success factor is a closely interlinked interaction of asset management, investment strategy, reporting and communication – both internally and externally.
From theory to practice: How GalCap has successfully transformed portfolios
GalCap Europe has supported institutional investors in the transformation of their portfolios in several mandates. Decisive success factors from practice:
- Integration of all properties into a uniform analysis and management system – from ESG assessment to CapEx planning and rental structure.
- Conception of a clear target architecture for the portfolio with concrete target quotas, benchmarks and prioritization criteria.
- Carrying out feasibility analyses for revitalisation or sale, supplemented by robust business plans.
- Implementation of active deal screening for future markets – such as life sciences or rent-controlled housing.
- Continuous communication with investors, regular reports on implementation progress and adaptation of the strategy in response to changing market conditions.
Result
Portfolio transformation is a discipline for strategically minded investors with a long-term horizon. If you set the right course today, you will not only secure profitability in the coming years – but also the ability to act in future market cycles. This is not about radical breaks, but about gradual development.
At the same time, investors should reflect on their own decision-making mechanisms – especially where long-term responsibility and short-term incentives fall apart. After all, if you only rely on seemingly easy-care core products, you run the risk of delaying the real challenges.
In the sixth and final chapter, we take a look into the future: What will resilient portfolios look like in 2030 – and what options for action can be derived from this?
