Traditional analysis of investments in real estate still dominates among individual investors, based on weak arguments, which are easily accepted but may be flawed.
This article intends to illustrate the modern approach of real estate investments adopted by the largest and most sophisticated global investors.
In contrast to individual investors, institutional investors tend to diversify their investments. On average, they allocate around 10% of their portfolio to real estate, a class of assets with attractive characteristics: low correlation with other types of assets, natural hedge against inflation and value protection in adverse scenarios.
Generally, investment portfolios are split among the main types of property: residential, retail, industrial and offices. However, other types of property segment are becoming more popular in portfolios: hospitality, student housing, self-storage, residences for the elderly, call centers, educational centers and hospitals.
Another widely used practice is geographic diversification, which allows institutional investors to mitigate their risk of property concentration and provides exposure to different regional economic cycles.
Investors also adopt different investment strategies using the concept of risk and return. The most widely used, known as “Core”, involves the acquisition of mature properties, which are profitable assets and are located in “Premium” regions. This strategy provides greater liquidity and income distribution, at a cost of lower capital appreciation potential relative to other strategies.
Secondly, we have the slightly riskier “added value” strategy, which is the second most used and aims to create value via real estate development: new constructions or reforms. In this case, the value of the investment is created when the cost of development is lower than the market value of the property.
The third strategy, which is the least common and the most daring of the three described here, is called “opportunistic” and aims for high returns using private equity investments techniques, such as leverage management and construction of scalable real estate platforms.
Regardless of the diversification approach and the investment strategy adopted, institutional investors analyze properties as variable income assets, which can lose value and generate losses over time. The search for the ideal time to invest requires understanding the real estate cycle and the relationship between property’s market price and its replacement cost.
Finally, real estate investment vehicles are becoming structured. Funds such as FIIs or FIPs , chosen according to investment strategy, capture tax benefits and provide diversification and liquidity for modern investors.
In summary, the most sophisticated real estate investors, with the support of specialized managers, seek to outperform the market average profit by adjusting risks, adopting active strategies and diversifying, methods rarely used by individual investors. With this perspective, Imeri Capital has advised family groups and companies to optimize their projects and real estate portfolios.