Demands for fee reductions and cost cutting strategies mean changes are inevitable says Bob Marsh, managing director, Taliance
Like many, real estate investors and asset managers have experienced a loud wake-up call over the past few years. In the heady pre-recession days of the early ‘noughties’, significant returns on investment were almost guaranteed. There was no need to analyse and attempt to improve workflow, processes or re-assess the tools used to achieve results. The only question was: ‘Will the results be good – or very good?’
Now constant pressure to reduce fees is forcing the issue. Cutting costs and identifying ways of doing more for less is a necessity. Where asset managers were once in charge of, say 10 assets, they are now being asked to look after 20, 30 or more, so reducing their ability to be responsive.
Clients unsettled by nervous markets are demanding more detailed and longer-term forecasting with multiple investment scenarios for better-informed decisions. At the same time, ever-evolving regulatory requirements are always in the background piling on further complexity and pressure. Many within the industry have come to the realisation that they can no longer just carry on doing what they have always done.
While many other professions and areas of business have taken advantage of specially-tailored software solutions, until now the property investment market has been at a loss as there has been a lack of comprehensive management and forecasting solutions for the asset and fund teams.
It’s almost as if the spread sheet has been too useful; after all it provides an independent and creative environment for modellers enabling them to input any formula, structure or design. But, spread sheets are becoming increasingly high-risk as market demands intensify and risk management becomes even more a core activity
Real Estate investment is complex compared with share dealing where investors simply buy and then hold or sell. Real Estate involves a long chain including property and facilities managers, assessing values is more difficult and there are more opportunities for data to be corrupted. This is especially the case if siloed information is consolidated manually using ’cut and paste’ techniques or even re-keying.
When data comes from many separate sources, how can its integrity be assured? This data can be easily compromised by mistakes such as a mis-typed number which then ripples exponentially through an entire spread sheet, quietly wreaking havoc.
If a client decides to extend their portfolio and changes need to be made, this revision has to be reflected throughout the spread sheet. Checking and subsequent re-work is tedious, but essential. As a result, asset managers can easily spend half a day verifying or recreating information when changes are made. But, when errors are made, there’s no record or audit trail of what has happened.
It seems that old-school methods are no longer coping with today’s demands, but what are the other options?
Traditional software systems are ’black boxes’; data is entered, processed and new data emerges. But, the fund world wants to see the formulas used and understand exactly what’s happening to the figures and models. No wonder spread sheets have remained the default tools for so long.
However, new software is coming on to the market. Smart software as it’s become known – is many steps ahead of these older systems. It provides all the benefits of spread sheets, but with the safety, flexibility and ‘auditability’ needed in today’s environment, while still enabling users to ’flex’ models.
Smart software sits on existing accounting solutions, but extracts the data from source. This means this data is no longer being re-entered manually or ‘cut and pasted’. It is totally connected to all other available information and will automatically react accordingly when any change is made. For instance, it will understand when ownership of a property starts and finishes or when the share held by the client varies – and the solutions will apply this information where appropriate – automatically.
The fund modeller who designs the investment structure is still key to the whole operation. But, they no longer have to manage the model, the system takes over. This leaves them free to become more innovative.
As data updates automatically as amendments are made, modellers and others can investigate an unlimited number of different scenarios to identify ways to create value, they can save these for reference and comparison purposes. They can run cashflow calculations and test the effect of different factors on all key performance indicators. Risk compliance teams have a comprehensive audit engine which tracks every change and gives full historical records.
Fund managers can use the software to flex models and provide fast feedback in near real-time. Questions such as: ‘What’s the best time to sell a property?’ or ‘What’s the impact if a tenant extends their lease or leaves?’ no longer take hours to answer.
This capacity to hold and process data in an intelligent way allows entire businesses to expand more easily without becoming overwhelmed by the need to manage and understand cumbersome data in multiple formats and from variety of locations.
One of our international fund manager customers has recently consolidated its asset management and funding processes in this way. It was concerned about the level of risk and limitations of working with spread sheets using data from disparate files and collected from a range of different workflows. Instead of working across separate silos and on spread sheets, its implementation of smart software now provides them with a continuously updated vision of all real estate, financial and accounting information, regardless of the physical location of the investments.
If the current economic clouds do have a silver lining for the industry it might well be this. Increasingly, many big names within the sector – and their smaller counterparts too – are identifying smart software as a way of coping with these roller coaster times. Those willing to make the move can help improve investor confidence, address regulatory demands, increase profitability – and be well-prepared for future challenges with a work force capable of handling the increased load.