Summary:
Real estate private equity firms operate with defined investment strategies
Clearly defined investment strategies are a necessity for marketing private equity funds
Real estate private equity investment strategies can be broadly grouped into four categories
Pro Forma Models has affordable and institutional-quality financial models applicable to many real estate private equity investment strategies
Introduction:
Real estate private equity firms operate with defined investment strategies. Clearly defined investment strategies are a necessity for marketing funds to investors and ensuring investors are informed when they invest capital in a fund. Real estate private equity investment strategies come in all shapes and sizes, but can be grouped broadly into the following 4 categories:
Core:
Core real estate investment strategies typically are the lowest risk, and therefore usually deliver the lowest return. A Core real estate asset typically has the following characteristics:
New construction
Class A quality
Prime location
Stabilized (high occupancy)
Creditworthy tenants
The Core investment strategy mainly involves keeping the property stabilized, meaning continuing to lease as vacancies arise and maintaining costs.
Examples of Core Pro Forma Models include:
Core-Plus:
Core-Plus real estate investment strategies typically carry low to moderate risk and deliver low to moderate returns. A Core-Plus real estate asset typically has the following characteristics:
Newer construction
Class A quality
Prime location
Stabilized (high occupancy) or potentially have moderate vacancy
Creditworthy tenants
Opportunity for small capital improvements
The Core-Plus investment strategy operates similar to the Core strategy, but the properties in this strategy typically have more upside potential. Examples of upside potential include:
Minor leasing undertakings, such as a vacant section in an office tower to lease
Small capital improvements, such as turning an underutilized space like a movie room at a multi-family property into a fitness center for tenants
Examples of Core-Plus Pro Forma Models include:
Value-Add:
Value-Add real estate investment strategies typically carry moderate to high risk and deliver moderate to high returns. A Value-Add strategy typically has the following characteristics:
Older property
Property may contain deficiencies
Property could be lower than class A
Property could be in a subprime location
Moderate to high vacancy or the desire to force vacancy for improvements
Lower quality tenants
Opportunity to increase value through capital improvements
Examples of Value-Add real estate investment strategies include:
Renovate units in a multi-family property to a higher standard and rents
Build out and lease up a predominately vacant office building
Turnover poor quality tenants at an industrial building to secure creditworthy tenants
Examples of Value-Add Pro Forma Models include:
Opportunistic:
Opportunistic real estate investment strategies typically carry the highest risk and deliver the highest returns. An Opportunistic strategy typically has the following characteristics:
New development
Redevelopment of an existing property
Existing property may contain deficiencies
Examples of Opportunistic real estate investment strategies include:
Buying raw land, zoning and receiving necessary permits, then building a property
Buying an existing property with plans to redevelop the asset into a higher use
Examples of Opportunistic Pro Forma Models include: