A vertically integrated company is defined as an entity who can procure their supplies, make their own products, establish distribution channels, market their produce, provide service and support. Vertical integration augments a company’s capabilities exponentially by enabling complete proprietorship over every aspect of the process.
In the world of real estate private equity, a vertically integrated firm focused on wealth creation for their investors would offer all three services – Real estate investment funds, construction services and property management under one roof.
Advantages of vertical integration
1. An all-inclusive range of investment products and services
Wealth creation, especially real estate wealth creation happens when investors can realize consistent and risk-adjusted returns. A real estate private equity firm can generate a visible passive income for its investors when it offers everything from real estate-based hedge funds to property management and consultation as a service.
For investors engaged with a vertically integrated private equity real estate firm, they have a single point of contact for all matters – be it fund investments, property management or any other aspect. All the required expertise and capabilities would be under one roof. It also results in a very smooth customer experience.
2. 360-degree approach to asset acquisition
A real estate investment firm without vertical integration capabilities can only acquire land and properties to augment its portfolio. It is then dependent on external agencies for every other element of the property management ecosystem (construction, redevelopment, maintenance).
Outsourcing these functions brings its own expenses. The cost incurred in developing the property diminishes the end value which could be derived from it. It may also lead to some properties not being acquired purely because of the cost of developing it.
On the other hand, a vertically integrated real estate investment firm would be happy to acquire a property which might need a significant effort to refurbish for its value to appreciate. Its in-house capabilities of constructing would enable it to do so quickly and efficiently at lesser costs.
What’s more, vertically integrated real estate private equity firms are also equipped to acquire a barren land plot and develop it from scratch which adds to its value significantly. It allows them to design, shape and develop the entire project from start to end, and then leverage their property management capability to uplift the value of the acquisition and finished product.
3. Natural arbitrage of proficiency and capabilities across functions
Real estate investment fund management, real estate construction, property management, advisory and consultation services are all components of real estate wealth building.
While these functions strengthen efforts put in towards wealth creation and generating real estate passive income, they are all distinctly different in nature as a service. A real estate private equity firm offering all these together would instantly have access to a diverse set of cross functional capabilities and talents. It also unlocks opportunities to collect their synergies and create a range of exceptional investment opportunities and avenues for potential customers.
Real estate wealth building gets elevated to a new high with an investment firm who can acquire, construct, redevelop or refurbish an existing property and offer financial asset management as a service through real estate-based hedge fund investment services.
4. Reduced Operational Costs
When a vertically integrated real estate private equity firm operates, it does so with all the functions necessary, under its own aegis. The cost of outsourcing construction, property management, hedge fund management and other such functions would cease to exist or would be a fraction of the expense incurred when outsourced or contracted to an external partner.
Along with the natural savings couped up, the in-house synergies between different functions aligned with a common objective ensures healthier quality of service delivery coupled with enhanced speed of service. These two components bring in their own tangible and intangible cost efficiencies which add to the bottom line.
5. Enhanced Profitability
When operational expenses are low, a real estate investment firm’s margins increase drastically. An investor working with a real estate private equity firm who earn more per dollar compared to their peers, would naturally be in safe hands.
An investment firm which earns more, puts capital back in customer engagements, social events along with the obvious investments in developing processes, practices, and tools which would enhance its services.
Other benefits of vertical integration within a real estate private equity firm are flexibility (being able to flex back and forth to adjust prevailing market conditions), business continuity (customers and investors have one place and one relationship which serves all needs) and superior customer experience for investors.
33 Holdings has been an integral part of Southeast real estate investment in general and Atlanta real estate investment specifically to deliver value add real estate investment as a service.