An abridged version of this article recently appeared in PERE.
As formidable challenges confront the real estate industry, firms are increasingly recognizing the value of incorporating critical leadership and strategic skills by appointing non-executive directors (NEDs) or senior advisors.
The role of an advisor has garnered growing importance, as evidenced by a recent survey revealing that 74% of companies in the real estate sector have increased the presence of independent directors on their boards within the last five years. These individuals, with their multifaceted expertise and impartial viewpoints, assume a key responsibility in steering companies, upholding good governance practices, and driving success. Tailored to the specific needs of the organization, the advisor role frequently encompasses an array of diverse responsibilities, including independent oversight, industry expertise, risk management and compliance, investor relations and stakeholder management.
Forward-thinking firms are embracing innovative approaches to the advisor role, recognizing that professional achievements alone may not fully capture the valuable insights and contributions that individuals can offer. Many are broadening their evaluation criteria to include a candidate's overall life experience, including a unique career trajectory, industry profile and diverse perspectives. By considering these factors, firms can leverage the tapestry of experiences and wisdom that candidates can bring, enriching board discussions and enhancing the strategic decision-making processes within the organization.
Unique expertise
Real estate private equity firms are often populated with professionals with strong financial, vs real estate, acumen and training. Supplementing these financial skills with external advisors who have a good understanding of the "bricks and mortar" fundamentals can play a pivotal role, making contributions to deals and the firm's overall success. The presence of such an advisor also enhances the firm's credibility with investors and business partners.
Supporting this concept, a 2019 study conducted by EY highlighted the advantages of appointing advisors with industry-specific knowledge. Companies that embraced this approach demonstrated a heightened ability to adapt to changing market conditions and seize emerging opportunities.
As David Matheson, Head of Real Estate Europe at Starwood Capital, shares, advisors “can bring an important diversity of thought and experience and provide invaluable insight into trends impacting our customers in other industries.” Starwood Capital recognizes the significance of advisors and leverages their expertise across various platforms, including private and public portfolio companies. These advisors fulfill critical roles by supporting, mentoring and challenging executive teams. “This enables us to arrive at better decisions,” Matheson added.
The importance of diversity
Historically, the real estate industry has demonstrated a lack of leadership diversity. Research conducted by Deloitte reveals that companies with diverse boards outperform their counterparts in the real estate sector. The study highlights that such companies deliver higher returns, exhibit a greater ability to attract top-tier talent, and adapt effectively to evolving market dynamics. The inclusion of advisors on boards presents a key opportunity to increase diversity at the senior level, a practice essential for good corporate governance as well as a sound business strategy.
Shaping the advisor role
Before embarking on the search for advisor talent, it is of key importance that senior executives engage in a comprehensive process of defining and aligning their expectations. This entails identifying the specific qualities and attributes that these individuals should bring to the board. Will the firm seek to fill particular gaps in the current talent pool, or will candidates be evaluated based on their distinctive perspectives, skills, knowledge and network? By clearly establishing these criteria, firms can effectively navigate the selection process and ensure that its chosen advisors are best suited to contribute to strategic goals and objectives.
The shaping of the advisor role is influenced by various factors, including the size of the firm, stage of the business lifecycle, complexity and ownership structure. Across both public and private property companies, the addition of advisors to their boards serves the purpose of broadening the company's network and accessing the skills and connections needed to facilitate the structuring and closure of deals.
David Sleath, CEO of SEGRO plc, observes “As a public company, SEGRO has long benefited from the support and guidance of up to six independent NEDs. Blending a diverse range of skills, experiences and backgrounds with a genuine, shared interest in the success of the business has proved to be a valuable formula in helping the management team think through our decisions in a wider context than might otherwise be the case.”
A steady hand in challenging times
Advisors also play a crucial role as mentors, drawing on their wealth of experience and serving as a "grise eminence" to senior management. As the average age of real estate CEOs continues to decline, many executives lack firsthand experience leading organizations through downturns. Advisors’ seasoned insights and experience in navigating economic cycles are invaluable in helping organizations futureproof themselves.
Given the multifarious challenges we are currently facing, including increasing interest rates, the war in Ukraine, energy price shocks, monetary tightening, peaking debt-to-GDP ratios, low unemployment and rising wages, CEOs and senior leadership can strongly benefit from advisors who have weathered previous market cycles and are able to help guide decision-making.
Today, real estate companies face a number of risks, including economic volatility, regulatory changes, environmental concerns and legal challenges. In this landscape, advisors play a crucial role in overseeing risk management and compliance efforts. Their independent advice enables them to identify potential risks and ensure that appropriate mitigation measures are in place. Furthermore, they contribute to establishing and monitoring robust corporate governance practices, which are vital for maintaining ethical standards and regulatory compliance.
The demand for talent
There is no rigid format for the role requirements of an advisor, allowing firms the freedom to tailor the position to their specific priorities. This adaptability empowers organizations to recruit advisors capable of effectively addressing the challenges at hand. Embracing such flexibility becomes paramount for securing future success, particularly given the rapid and transformative changes unfolding in our industry. From the integration of artificial intelligence (AI) and advancements in property technology (PropTech) to meeting the evolving demands of Generation Z, businesses must remain agile and embrace forward-thinking strategies to stay ahead in this dynamic landscape. By embracing flexibility in the advisor role, companies position themselves to navigate these shifts successfully and seize new opportunities.
Recognizing the value that property professionals bring, businesses beyond the real estate sector, such as those in healthcare, hospitality and retail are increasingly acknowledging the benefits of incorporating their expertise. This is especially relevant in cases where real estate plays a central role in operations and represents significant operational risk.
From an LP’s perspective, Achal Gandhi, Global CIO of Indirect Real Estate Strategies at CBRE Investment Management said: “We have three NEDs - based in London, Amsterdam and New York, that sit on our Investment Committee, and each member brings something different to the table ranging from real estate specific academic expertise to long standing experience in overseeing global real estate investment programs for US and European institutions. For our business, that invests globally, having a group of NEDs that are complementary in their skill set and spread across regions brings fresh, on-the-ground perspective, challenge and unencumbered judgement.”
Vital to the future
Research and real-life case studies consistently prove the valuable contributions made by real estate advisors to the success of companies operating in this dynamic industry. As the real estate landscape continues its evolution, highly qualified advisors will be vital to driving the growth and prosperity of these firms, assisting in navigating the complex sector challenges and seizing opportunities.
Regardless of the approach taken by organisations to identify and structure the advisor role, it is paramount that the ultimate choice is made with careful consideration of board chemistry. When advisors mesh well with the executive team, the outcomes can be truly transformative. By prioritizing board chemistry, companies can harness the full potential of their advisors, leading to enhanced collaboration, cohesive leadership and optimal results.
For additional information, contact Serena Althaus.