Investment Strategies Explained

Breaking through into a career with a real estate private equity firms requires a great deal of preparation. To stand out from the crowd of applicants you must demonstrate that you know more and will work harder than anyone else. Understanding what makes a firm tick means understanding their investment strategy.

What is an investment strategy? An investment strategy is most concretely understood through what types of properties, in which markets, and at what risk level it chooses to invest. The strategy may be specific to one particular fund, or it may be an overarching theme that defines all of the deals the firm pursues. These strategies universally apply to real estate private equity in London, Singapore, and all points in between. There are four investment strategies: Core, Core Plus, Value-Add, and Opportunistic.

Core

Core real estate investments are command lowest risk and thus the lowest return. Core assets are fully occupied, achieve market rents, attract high-credit tenants,  sport excellent physical condition with no deferred maintenance, and are located in primary markets such as New York, Los Angeles, Chicago, San Francisco, London, Paris, etc. Generally, there is no expectation of appreciation and performance will be predicated solely upon rental income. Rates of return are typically in the 7-9% range, and minimal leverage (less than 40%) is common among core investment funds.

Core Plus

Core Plus is similar to Core, but has some opportunities to increase Net Operating Income (NOI) and therefore generate some appreciation in the value of the property. A property may have tenants with a lesser credit profile that could be replaced with better quality occupants in the future. Or, a tenant may have a lease expiring in the next few years, and the opportunity to replace that tenant with one paying higher rent would improve NOI. Core Plus real estate could also be properties that meet the credit quality and condition of a Core asset, but is located in a smaller market (Dallas, Atlanta, Phoenix, Minneapolis, etc.). Returns range from 8-11%, and leverage may be slightly higher as well (40-60%).

Value-Add

Value-add properties present investors with higher opportunities for returns (12-15%), but that comes with more risk. Often times, a value-add play will involve acquiring a property with significant vacancy (greater than 20%) with plans to re-tenant, or it could involve a redevelopment of the property such as tearing down part of a shopping mall to build apartments or turning a former warehouse into an office building. Value-add properties also tend to have more leverage (60-70%), helping to boost returns.

Opportunistic

Deals that fall into the Opportunistic bucket are frequently ground-up development. These projects involve a much higher risk because of the complexity in bringing them to fruition. Entitlements, construction, leasing, and capitalizing are all significant risk factors with opportunistic projects, hence the returns are usually above 20%. Leverage may climb as high as 80-90%. Such high leverage often involves some type of mezzanine financing to fill the gap between bank financing and equity.

Conclusion

If you are seeking a career with a real estate private equity firm, knowing the investment strategy the firm employs before you walk into an interview is smart. Demonstrating that you have researched their fund offerings and can explain the how, why, and where of their portfolios will help you stand out in the interviewer’s mind. Once you’ve landed the job, investment strategies keep you focused so you spend your time on deals that fit the funds. Real estate private equity in London, Los Angeles, and Laredo all fit into one of these four strategies.