Commercial Real Estate Investment Strategies
The current war in Ukraine and supply chain disruptions have caused a surge in inflation all around the world. This is why many are looking to include tangible assets that serve as hedges against these rising prices. There are several approaches one can adopt but investing in real estate (especially commercial real estate) works best in this high inflationary environment.
While commercial properties offer significant returns, an effective investment strategy is needed to yield better returns. Graana.com, Pakistan’s smartest property portal, provides details about commercial real estate investment strategies that can be used to maximise returns.
Types of Commercial Real Estate Investment Strategies
There are four main types of real estate commercial property investments: core, core-plus, value-added and opportunistic. These strategies offer different levels of risk and return on investment. Before choosing one, you need to define the goals of your investments as every potential deal requires a different approach. After that, you can use the following strategies to build a diversified investment portfolio.
This is one of the safest commercial real estate investment strategies as it involves buying and holding of high-class assets that generate a steady income for investors. It is generally a low-risk investment strategy and offers a relatively low rate of return.
The primary goal of investors in this strategy is to start collecting income without doing any renovation work or tenant placements. They look for buildings that are already generating regular income. In order for this strategy to work, investors have to determine their target property such as apartments, office space, retail stores etc.
In this strategy, investors target class A buildings to secure a long-term lease from the tenants. These buildings may not require any further renovation as they are maintained quite well. This type of investment strategy in real estate is ideal for those who are looking to preserve their capital and have a stable income flow instead of a significant increase in the value of commercial real estate.
When compared to other investment strategies, it may seem like a less attractive option but the risk involved in other investment strategies makes core a better commercial real estate investment.
This is similar to the core strategy but it involves more risk for the investor. In the core-plus strategy, investors buy and hold an asset that is considered appealing for the masses. There is a chance of getting returns in the form of value appreciation but the building may require some renovation to attract more tenants. By providing further facilities and amenities, an investor can gain more profits from sales due to property appreciation.
This commercial real estate investment strategy involves properties that generate regular cash flow but investors make further improvements (like cosmetic changes) in order to increase income. These changes will improve customer satisfaction and help in reducing the operational cost of the property.
After this, investors will look to sell to gain profit from the appreciation of the property. Any value-added project will offer a higher rate of return. However, the risk is much higher compared to the core and core-plus investment strategies. The risk is much higher because the property you are buying isn’t operating at its full capacity and will require some improvements to do so. Without making these changes, the investor may not be able to execute their business plan, which may eventually force them to sell the property at a lower price. However, many investors opt for this investment strategy as it offers the perfect balance of risk vs. return.
In the opportunistic real estate investment strategy, the operator follows the same approach as in the value-added strategy, but it is a lot riskier. The investors target properties that require a lot of significant changes in order to operate at full capacity. In most cases, the investor acquires land to build the property from scratch.
This type of strategy involves more risk but generates much better cash flow compared to others. If the operator is able to execute the plan, the investment can help you to achieve a higher rate of return through rental income and value appreciation of the property.
Due to the higher rate of return, this is one of the most attractive commercial real estate investment strategies for investors.
Commercial real estate is one of the most lucrative investment options. It is illiquid in nature compared to residential real estate investment. It offers a better return on investment but you have to wait for a period of time to get quantifiable returns. Hence, it is better to invest in commercial real estate if you’re looking for long-term investments as it will yield returns through property appreciation after two to three years. Besides the illiquidity, this asset class requires much more initial investment and involves higher risk compared to other assets.
If you’re thinking about investing in commercial real estate, you can use the aforementioned strategies to create a diversified portfolio. There are some other commercial investment strategies, but these are some of the commonly used ones. Each strategy has its benefits and drawbacks but it depends on your investment goals and needs. By using these investment strategies, any new or seasoned investor can make an informed decision to achieve their goals.
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