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Family office interview: Why this single family office is looking to tech and behaviour to drive their real estate strategy

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Automation will help supplement traditional core commercial value-add strategies in real estate for family offices.  That is the view of Michel Heller, head of real estate investments at a private office of a Middle Eastern family.  Heller is looking beyond the conventional commercial buy-and-hold approach to alternative real-estate assets where he says returns will be supplemented by new technology.

Heller has a mandate from his family to invest in commercial real estate across Europe, the Middle East, Asia and the US.   He invests directly into European industrial and commercial real estate in those big cities, he says, will weather any storm.  In the US and Canada, he focuses on direct investment in retail, student accommodation and opportunistic commercial.

My job is much more data-driven than at the beginning of my career. There is more analysis of how people operate and what they want. How space can be used differently

“Our strategy is focused on income producing commercial assets moderately geared with a view to purchasing properties to hold as part of a ten to fifteen-year business plan,” says Heller. This is the kind of long-term strategy where market cycles, affected by upheavals like Brexit are not a big reason to sell, but provide opportunities to buy, adds Heller.

Indeed, while Heller does believe the impact of Brexit has the potential to re-price the whole of the UK real estate sector. “Maybe investors will re-rank Britain to be comparable with Germany or France. when it comes to real estate.” But he also says markets affected by upheavals like Brexit will also present opportunities.

And Heller sees the growth of the tech market in the UK, which continues to flourish regardless of the uncertainty around Brexit, and the application of automation to asset-backed businesses as a key to sustaining yields.

“The tech sector in the UK is growing, and levels of entrepreneurship in the UK are miles ahead of what’s being seen in Europe. That will lead to jobs being created and people needing different types of services.”

And what really excites Heller are opportunities to invest in real estate where technology will drive down operational costs.  These cover a broad range of what he calls “alternative real-estate assets” including car parking, garden centres, self-storage, nursing homes, student accommodation and youth hostels.

In the car parking sector, Heller says: “Automation means a car parking space is becoming cheaper to manage, resulting in a higher income profile for the same cost of yield.”   The same concept applies to a range of operating business such as self-storage where the use of conveyor belts and delivery boxes require less manpower. Similarly, youth hostels with electronic keys, CCTV and automated processes for checking in and out requires less management time, leading to a better return.”

Heller’s behavioural approach to analyzing investments means that he sees a bright future for retail, but only once it has worked through its current problems. “The Internet is an easy scapegoat for everything that has happened in the retail space but I don’t think that’s the whole truth.  Retail is getting hammered by how people are behaving and interacting. Car parking, for example, is very difficult on the high street.”

The sector will also need support from governments to bloom. “There will be big opportunities in the retail space but governments are going to have to do a huge amount of work to help turn things around,” says Heller.  “Retail is suffering much more in the UK than the US and that’s partly down to taxes. For example, when retails stores are left vacant in the UK there are significant charges on empty spaces.”

Heller says landlords will also need to be a little bit cleverer about how they use retail space and for investors to reappraise how that is priced.  “Amazon and those like them are key players with the ability to create more automated stores. These will be electronic drop in and drop off points in retail high streets/main streets turning retail stores into giant vending machines.”

“Similarly, shopping centres will have to change by providing more and more leisure capabilities, a trend we have started seeing in the last decade but one that is going to have to catch up with user demand.”

The evolution of the high street will inevitably focus on stores where a physical need is required, and, consequently, hairdressers and nail bars will benefit.  But ultimately, Heller says, the sheer amount of space means that high street stores will become more automated.

“Our view is that consumer trends are changing and will continue to change which inevitably will have a huge impact on pricing the retail sector,” says Heller.  “The high street will become more automated and out of town retail will become more industrial, and industrial will need to become significantly more sophisticated.  This will happen to enable faster and faster delivered within cities.”

Heller says the need to understand the mechanics of cities and how people are living and working is more important than ever:  “My job is much more data-driven than at the beginning of my career. There is more analysis of how people operate and what they want. How space can be used differently.  What we are trying to do with that data is to make operational efficiency a much stronger element of real estate.”

What’s certain is that real estate expertise is changing.  If the 2000s saw the expansion of so-called behavioural economics/finance expertise in banks, then today the equivalent is also happening to the real estate profession. And that will lead to many opportunities, says Heller.

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