|
BASIC STRATEGIES
There are three primary categories of commercial real estate investment strategy, each have certain risk and return characteristics. Here is a look at the three asset categories, and an explanation of characteristics.
Core Investments
Core commercial real estate programs generally use conservative strategies for lower-risk investments. Core properties are typically well-leased and well-maintained properties located in well-established markets. Fund managers seek core investments that have stable, highly creditworthy tenants.
Core investment programs are long-term investments. Core investments are designed to protect against inflation, and have a primary investment objective of creating income and capital preservation. Typically core investments have a long-term holding period of eight to 12 years.
Core Summary:
- Conservative risk
- Long-term holding period (eight to 12 years)
- Objective is current income
Value-Added Investments
Value-added investments offer a moderate level of risk. The goal of value-added investments is to acquire properties that need improvement or repositioning. Properties classified as value-added usually require amenity and aesthetic upgrades, or require management or operational improvements. Value-added investments usually have a short-term holding period of three to six years and focus on appreciation rather than income.
Value-Added Summary:
- Moderate risk
- Mid-term holding period (three to six years)
- Objective is value appreciation
Opportunistic Investments
Opportunistic real estate investment programs assume the greatest risk of all three asset classes, but have the objective of generating higher returns. These investments generally require the investment program to convert, redevelop, or reposition an existing property in order to seek its highest and best use. Acquisitions may be concentrated in limited geographic areas. Opportunistic investments generally have a short-term holding period of three to six years, and are geared to maximize appreciation. To add value to the property, program managers may re-tenant, reposition, recapitalize, develop, or redevelop it.
Opportunistic Summary:
- Higher risk
- Short-term holding period (three to six years)
- Objective is significant value creation
Real Estate Ownership Risks
- Absence of properties identified for acquisition
- Absence of a public market for these securities
- Lack of an operating history
- Limited transferability and lack of liquidity
- Reliance on the REIT’s advisor
- Payment of significant fees to the REIT’s advisor and its affiliates
Potential conflicts of interest
- Incurrence of substantial debt
- Lack of diversification in property holdings until significant funds have been raised
>REIT Glossary
|
