The word 'strategy' means a thoughtful approach to achieving a goal. To choose a strategy, you need to know the goal. The goals differ depending on the preferences of the investor himself, on the planned period of participation in the investment, the calculation of available resources and the expected income. So, when the goal is known, you can choose an investment approach and strategic guidelines. There are four main strategic styles, which are indicated in English.
Investment Strategy Core
This is a long-term investment planned for a period of 20-25 years or more. To acquire an object, most often only own funds or own funds are used, plus a small share of additional financing. The purpose of this type of investment is to acquire liquid properties in large and medium-sized cities with a predicted stable income. Objects with a central location of category 1A and anchor tenants are considered attractive. Location plays a critical role and prevails over yield. The investor looks far ahead and the purpose of the investment is not to get a quick income. The main thing here is to increase your financial portfolio with high-status real estate and objects of historical and cultural significance. An investment property is selected taking into account long-term ownership and is often viewed as an investment that can become fundamental capital and will be inherited. For example, such objects can be located on the famous Kurfürstendamm boulevard in Berlin or on the Königsallee in Düsseldorf. Core is the most predictable type of investment. This strategy has the least amount of risks and does not directly depend on market fluctuations, since it is calculated for a long time period. Profitability indicators can be 3-4%, sometimes less. But, as mentioned earlier, this is not the dominant factor in this type of investment. I will note separately. Real estate such as hotels and retirement homes or apartment buildings in large and medium-sized cities, which an investor acquires with the expectation of a long-term ownership of at least 20 years, can also be classified as a Core investment, but not in the classical sense. Since these objects may not have the most central location, they will still preserve the long-term and stability of Core-classic.
Core-plus investment strategy
The Core-plus style differs from the Core-strategy by choosing a property. The main focus here is on investing in existing and leased properties, taking into account the potential for their further development. It is the potential of the object that plays a fundamental role. Location, as in the previous example, is an important component that directly affects the investment prospects. So, short-term lease agreements make it possible, after their expiration, to revise the terms of the existing lease. By carrying out the reconstruction of the building, renovating the premises and changing the tenant, you can increase income and make the object more liquid and attractive. An example of this kind of investment is the well-known network of trade houses in Germany 'Karstadt'. Department stores have always been located in the central regions of the country's cities and have had a long history since 1881. But, the format of large department stores is outdated and in the 2000s the chain began to lose its position in the market.
Some of the branches were closed, huge shopping areas were empty. In 2014, department stores were put up for sale. There were new buyers, new ideas for reconstruction and revitalization, on which great hopes are pinned. Debt capital in this style of investment is used quite actively and can be about 50 percent. Investments Core-plus also generates part of the income by increasing the market value of the property itself. The location of such objects is usually characterized by good traffic and stable demand from tenants.
With the right approach, the potential return is higher than that of the traditional type of Core investment - 4-6%. But here the influence of market fluctuations, management strategies and management increases, because of which the investor's risk arises.
Value-added investment strategy
The investor's goal in this case is to select an object below market value and increase its value by renovating the building and / or changing the tenant. At the same time, the strategic goal is not to increase Cash-Flow (cash flow), but to significantly increase the value of the object. In this case, additional financing is actively used and the share of borrowed capital can reach 60-70 percent. The ultimate goal of the investor is a profitable sale of the object. For example, there was a period when, after the reunification of Berlin, it was possible to buy an apartment building in need of reconstruction and, having made high-quality repairs in it, to sell this property by dividing it into separate apartments. With such actions, the income from the sale increased sharply. At the moment, it is becoming more and more difficult to find such objects and the result of this investment is difficult to predict. Various manipulations with auction real estate, the purpose of which is to buy cheap and sell dear, can be attributed to the same type.
The expected retention time of the object is much shorter than in the case of the main investment - no more than 5-7 years. The profitability of the Value-added strategy is much higher than that of Core and Core-Plus and can be 8-10%, but the risks increase accordingly.
Opportunistic investment strategy
This is a short-term type of investment in which both existing real estate and the project stage are used as an object. An object in the design stage can be brought to the next design stage. The relevant building permits and type of activity were obtained, as well as the approved technical documentation. These actions take this project to a new level of its estimated value. Investors with such a strategy choose low-value properties or objects with a high degree of growth in value due to dramatic changes. For example, finished buildings are often selected with the expectation of a major renovation or complete rebuilding. Real estate that is currently illiquid due to the difficult market situation in the region, the absence or low rent and other negative factors that need to be leveled as part of repositioning. Such objects are located in medium and small cities and often have empty areas.
They are rebuilding not only houses, but also the surrounding infrastructure: they renovate local institutions, improve yards, build new playgrounds, etc. After such actions, the whole block becomes more attractive and comfortable for living, attracting new tenants and automatically increasing the value of the property itself.
The profitability of this type of investment is from 10% and more. In some cases, the yield on such transactions can reach 20-30% or more. The retention time of the object is always short-term and the actions are aimed at fast resale. At the same time, high income also implies high speculative risks.
However, these factors are not always directly related. A careful study of the situation, an understanding of the market and a balanced approach to investment can balance these factors and reduce risks. The combination of these actions will help you go the way to a successful investment that will meet expectations and bring the desired profit.
Do not miss:
Alexander Elizarov
Managing Partner
PARK INVEST - Real Estate Agency (Germany)
+ 7 (921) 965-06-64
+ 49-176-349-531-52
