Rafik Moore is the Principal Broker and founder of Caspian Group.
Feb. 7th, 2019 – Historically, real estate used to be owned predominantly by regional private real estate investors. In the last three decades however, this investment vehicle has become popular with large institutional investors. In my opinion, technological progress created higher levels of efficiency and more transparent practices which brought a new kind of investor from Wall Street into the local real estate investment eco-system, changing the rules of the game to the point where real estate now represents over 15% of institutional investment portfolios. This newly evolved buyer type brought more liquidity and demand by pumping billions of dollars into our industry creating the most opportune times for private commercial real estate investors.
Even though the real estate industry has experienced a drastic transformation, the main four strategies around real estate investing have mostly remained the same. Different investors have different strategic goals and inclinations, some want to have safe and steady returns while others desire high returns and are willing to take more risk. Each strategy has a different risk/return equation and may necessitate various types of leverage, since the amount of leverage has a direct impact on return on investment. The four investment strategies are: Core, Core Plus, Value Add, and Opportunistic.
Core investment strategy is considered to be the least risky because it involves investments into well located, stable, fully leased assets. These include class A buildings with long term leases to high credit tenants in desirable locations. These properties are often in great condition and require very little ongoing maintenance. These stable investments generally do not experience significant appreciation in value, but deliver stable, predictable cash flow with fairly low risk. Many investors view them as attractive investments for the level of risk they provide because they seek capital preservation and long hold periods. While core investments are typically not as liquid as stocks or bonds, they are usually the most liquid assets when compared to value add or opportunistic.
Core Plus investments are analogous to core, but have more risk associated with shorter lease terms or some minor vacancy. This kind of a strategy is often confused with value add strategies. The term “core plus” was originally defined as “core” plus leverage, or leveraged core. While core investors might see shorter lease terms as a threat to steady income, Core Plus investors might see this as an opportunity to raise rents and increase returns. Core-Plus investment strategy is focused on income and growth, and offers more potential for upside appreciation.
Value Add strategy has a higher risk, but will generate higher returns than core or core-plus investments, primarily because of value appreciation. This strategy typically includes properties that have substantial risk associated with vacancy, deferred maintenance, functional obsolescence, structural damage and require rehabilitation. Often at the time of acquisition, the property is not performing at its full capacity as it may have vacancy, been leased at below market rents, or has been poorly maintained or mismanaged due to capital constraints.
If the investor does not execute the projected stabilization plan in a timely manner he/she could be forced to sell the property at a price lower than cost basis to pay off the underlying debt. Value add projects provide a perfect balance of risk vs. return, offering in-place cash flow at the time of acquisition with significant upside potential in the form of value appreciation. Leasing is often considered a critical part of a value-added strategy. Effective brokerage teams and marketing strategies can attract strong tenants to improve cash flow and raise property value. This approach, in my opinion, is the most popular strategy at the moment.
Opportunistic investment strategy has the highest risks, but offers most return. This strategy is characterized by targeting underperforming and under-managed, distressed properties, using high degrees of leverage to acquire the property, hold it for a short period of time, and then sell it at a profit. The properties often require a redevelopment or adaptive reuse. This strategy may also involve investments in development, raw land, and niche property sectors. Opportunistic Investments are tactical, and may include arbitrage or strategies focused on working out complex debt structures on highly leveraged assets. These types of projects offer the highest level of return if the business plan is successful, but also bear the most risk as the properties have little to no in-place cash flow at the time of acquisition.
At Caspian Group, we mainly focus on value-add and opportunistic investment strategies. Our goal is to maximize returns, while minimizing risks for our investors using various unconventional tactics and strategies. For example, when purchasing properties with vacancies we ask sellers to allow us to market them for lease during due diligence period, before closing on a transaction. Sometimes we involve sellers in financing, which reduces the equity requirements and rises internal rate of return while helping sellers to achieve tax deferral and provide a secure investment. Also, we reverse engineer some opportunities by matching up a prospective tenant with a distressed undervalued property, creating a lucrative investment vehicle with higher adjusted returns. Caspian Group, consists of Brokerage, Development and Management teams works harmoniously to solve various commercial real estate problems for our clients, while offering our investors high adjusted returns on investment.