Exploring new avenues for value creation
In this article, we look at ways investors might generate higher returns from real estate and at the current opportunities for doing so. We also review the factors we think investors must consider when managing the risk of these investments. We look at the potential opportunities, along with the types of investment vehicles and structures that might be used to access them. These are also important considerations and key factors that influence performance for investors.
Real estate investors are increasingly seeking strategies that might deliver higher returns in an evolving investment landscape where debt is less accretive than it has been in the past. In particular, fixed income returns have increased following the post-GFC decade, during which government bond yields languished at and below zero. In the standard financial economics risk-return framework, higher returns can only be achieved by taking on additional risk. For real estate, this could mean buying buildings that are not fully leased or that have vacancies, improving assets via refurbishment projects, or taking on leverage to enhance returns.
Investors can also generate higher returns by participating in development activity. Construction is normally undertaken by specialist developers, with whom investors can either undertake a joint venture (JV) or commit to purchasing the completed asset. Under the JV approach, investors provide equity and participate in development profits (and risks). Alternatively, investors can commit to buying the asset once construction is completed, often on a fixed or capped-price basis, and either fully leased or accept some form of lease-up risk in return for a lower price and higher potential returns. As with the traditional asset classes, investors in real estate can also look to generate alpha by investing opportunistically. Alpha investments are those with expected returns in excess of those warranted by their expected risk. Generating alpha is the ultimate goal for investors across asset classes and relies on skill, expertise, specialist knowledge, and insight.
Generating alpha from asymmetric information
How can investors generate that elusive alpha in real estate? Asymmetric information and good market intelligence can potentially lead to excess returns for well-informed investors with strong insight. Real estate markets can be opaque and subject to differing opinions on valuations and prospects. In general, creating alpha stems from opportunistic investing, strong networks, deal-sourcing capabilities, and taking advantage of idiosyncratic opportunities that arise. One possibility is benefiting from market dislocation and distress.
Read the full ‘Thought Leadership’ article at the link below
