Real Estate Investment strategies: definitions and examples
Wissens | January 24, 2019
Four main strategies are defined in the real estate investment process. They are core, core +, value add and opportunistic, in addition to smaller strategies such as developments. It is important for investors to understand the different strategies in real estate investing, in order to take the best decisions. While the strategies Core/Core + must be maintained over the entire real estate cycle, the market timing is crucial for opportunistic/Value Add strategy. At BrickVest, we gather core and core + strategies into a single one called Stabilized Income strategy, as they are very similar and share the same goal: a regular long-term stable income.
The Core investment strategy mainly targets new or recently renovated real estate assets or in which there is no significant work to be done, located in ideal locations where there is a scarcity of such products. They usually offer a wide range of services and are occupied by financially stable tenants who have signed long-term leases. These acquisitions are made in the perspective of highly stabilized returns and to diversify the portfolio.
The Core + assets are also well located but may require small renovation work. They may have a slight unoccupied vacancy causing a loss of cash flow. Investors accept a less secure return in exchange for a potential increase in the value of their property. The return on investment of these operations is smoothed over the holding period – the duration of the investment - (10 – 12 years) by the collection of rents, then in the long term by the resale of the asset.
This strategy aims to reposition an asset on its market by creating value through dynamic work operations. Buildings with vacancies or technical obsolescence requiring work are the most common targets for value-add strategies. Investors seek to increase the profitability by finding new tenants and thus sell at a higher value. Since this strategy is a value-creating operation, the investor usually does not intend to hold the assets for more than 5 years. The return on investment of these operations is mainly at the end, as it is realized when the asset is resold at a higher price. These operations are therefore dependent on the success of the asset repositioning and the performance of its market, which presents a risk.
Opportunist strategy aims to develop, restructure or transform an asset and identify the emerging investment opportunities and trends before they are fully recognised by the market. These are therefore operations requiring technical skills to estimate the costs and manage the project. This strategy presents the greatest risk but offers the best potential for profitability. The investor agrees to take significant risk in order to achieve high profitability. The nature of these operations leads to a holding period between 2 and 4 years, the duration of works.
Development strategies constitute a smaller category. A project is developed from scratch: from buying the land to the completion of the project. This is the riskiest strategy in real estate investing, but also the most profitable.
In all investments, return is function of the risk taken. The investors focused on income should prefer core and core+ strategies while investors with appetite for risk and long-term perspective should privilege value add, opportunistic and development strategies. There is an individual strategy for each investor according to his risk-return expectation.
Comparison table of real estate investing strategies:
|Core||Core +||Value Add||Opportunistic|
|Signification in the stock market||income||Income & Growth||Growth||Growth|
|Risk||Low||Low - Moderate||High||High ++|
|Participation of the owner||Passive||Active||Active + deep knowledge||Active + years of experience|
|Holding period (years)||10||10 – 12||< 5||2 - 4|
|Return expectation||6% - 10%||9% - 12%||12% - 18%||+18%|
|Rate of leverage (LTV)*||-40%||40% - 60%||60% - 75%||+70%|
|Example||Single-let Victorian building in the centre of London||Multi-let office building||Building with vacancies||Ground up development / conversion hotel into apartments|
*Rate of leverage: The leverage ratio defines the percentage of debts used in the investment