John F. Kennedy once said, “When written in Chinese, the word ‘crisis’ is composed of two characters. One represents danger, and the other represents opportunity.” If one gets into the nuances of linguistics the above quote might be considered fallacious. However, it certainly carries some kernel of truth. The recent global financial crisis too resonated with what forms the essence of this quote. It undoubtedly represented danger to economies worldwide; but it also brought in its wake dramatic changes that can be viewed as opportunities.
One such change pertaining to the investment style of real estate investors shows a gradual change in attitude from optimism to prudence. Earlier, whenever investors were looking at the real estate market they placed greater stress on trading values derived from inflated rents, exaggerated future cash flows and a positive outlook in general. In the present-day, each deal is examined with a far more prudent outlook. However, to simply state that all investors pre-crisis were optimistic would be a massive generalisation. Seasoned investors in the property market have always taken a well-planned approach and adopted specific investment styles that are applicable globally pre or post crisis.
Investment in core properties is a very basic investment style wherein investors acquire relatively low-risk properties that are at least three- quarters leased to tenants who hold a good credit record. Their goal eventually is to receive a stable cash flow with competitive returns to comparable properties. Moving on, contrarian investing is based on the premise that the investment outlook for a specific property type would be poor amongst other investors. For instance, investors might form the opinion that online shopping would have a negative impact on retail properties. In such a case, a contrarian would wait until these specific types of properties become available at relatively lower prices and would then invest in them with the expectation that prices would move upwards going forward.
Investment in ‘blue chip’ properties is another investment style adopted by those investors who consider only those properties that have some unique attributes – architectural, locational or otherwise. These properties are highly visible and well-located and are looked upon as lucrative investments for the long term. Opportunistic investing is one wherein an investor acquires properties from other investors who are currently in financial distress and/or the property in question needs an upgrade or some form of renovation. However, opportunistic investment is tricky in the sense that the success of the investment is directly dependent on the investor’s ability to purchase the property at a discount as well as the management’s understanding on how to provide an overhaul or reposition the property. Such investments also need a carefully planned exit strategy.
Besides these, there are a host of other investment styles adopted by seasoned investors and portfolio managers. What works for one type of investor, might not necessarily work well for another. Many of these strategies overlap and in essence they are all means to an end – the end being realisation of superior investment performance.
About the author
Ankita Satnaliwala is the Senior Analyst, Research and Real Estate Intelligence Service for Jones Lang LaSalle in India, based in Kolkata.