When appealing to investors through your idea about a certain property it is good to know which kind of different property investment categories that there is out there, so you know which category your property and idea falls under. The main difference between investors is their willingness to risk and also the type of real estate portfolio that they have (if the investor has one), because of this the different investment property types is divided up according to risk and return. In short- the riskier the investment property is, the more return is expected and the less risky the investment property the lower the expected return is. The different investment types are divided up into four categories, which we will go through now. CORE This is the least risky of the four different investment types. The stereotypical example here would be an already existing office or residential building that is fully leased up (rented out), with loyal tenants and with a very low vacancy rate in the heart of the city. The property is also in no need of any bigger improvements. It is a safe bet to say that this type of property will continue to be attractive for tenants and demand little to no huge expensive improvements and therefore it comes with a low risk tag but also with a low return tag. Investors that invest in this type of property want to have a stabilized cash flow, typically over a long period of time and focus less on the appreciation value of the building. CORE+ This is an investment type that is much like the core property, but differ in some areas. This property has potential to be turned into a core property with a few changes. The core+ property could for example have a slightly worse vacancy rate because of the tenant type, be a less well-managed property with big expenses, be in need of light improvements etc. The core+ property could have one or several of these negative points. The positive points are that a core+ property is typically in an attractive neighborhood and still have a relatively steady and predictable vacancy rate that is more positive than negative, and that the building is typically in good condition and in no need of bigger renovations in the near future. Investors that invest in this type of property want to turn a less stable cash flow into a fully stabilized cash flow with fewer small improvements, which also have the potential to create a slightly bigger appreciation value of the building after the improvements have been made. VALUE-ADD This is an investment that is linked with a moderate to high risk profile. It is a property that is for example characterizes by having a very bad, even negative cash flow. It is a run-down property in the need of a big renovation, or it could be a property that had the use as an industrial building before but is transformed to a residential property, so a change of use. This all means that the property in some way is in need of a big investment. It is not a stabilized property, but it therefore also provides the possibility for a big appreciation jump up and for the creation of a stabilized cash flow property if the market has been analyzed correctly, the numbers add up and that the market is at a good point in the market cycle. Investors that invest in this type of property are more willing to take a risk for the potential of a bigger return both in yield and in appreciation. OPPERTUNISTIC This is the most risky of the four investment types. The typical examples could be development of a vacant plot of land or tearing down a dilapidated building and building a new one. It is characterized by the simple fact, that before the project is underway, that the “property” has little to no value for generating cash flow, as it does not yet exist. As it is the most risky it also represents the biggest potential for an upside, but it also represents the biggest risk, meaning that the guarantee of you getting your money back is also the lowest, but as with life there is also no guarantees in real estate, even if you invest in core property with a stabilized cash flow instead of an opportunistic development project. The two categories of value add and opportunistic is where the developer is active, as these two investment types are their specialty, but more and more pension funds also seeks towards this type of investment as real estate has almost become something of a “sure” investment, where you always get your return, but the fact of the matter is that even if real estate investment is less risky and less volatile than the stock market it is still a very risky endeavor and especially if it is real estate development. With this said, people will always need a roof over their head, and if one part of the market is in a drought, another part of the market can be growing. Therefore, adaptability and a spread of different investments strategies in different types of properties (products) will always be preferred as to lower ones risk if one area of the market is falling, then you also have properties in another part of the market that is growing. Thank you for reading.
In the real estate game, you have quite a few actors that all contribute to a projects realization. They contribute with different skills and are relevant in different phases of the process from idea to realized property. *Simplified list Real estate developer They are the ones initiating the project and putting all the pieces together from financing through design to selling or holding the property. Financial institution/ bank They are the ones loaning capital to real estate developers in exchange for an agreed upon interest rate and a payment plan, as real estate developers seldom finance their project with a 100 % of their own equity. Private/ institutional lender This can be several different actors. It can be a rich private individual, a crowdfunding source, a fund, who can help the real estate investor fund some of their project or all of it based on an interest rate and established payment plan. Municipality They are the ones who determine what kind of given project can be realized based on the specific regulations set out from the development plan in the given area. They set the framework for what kind of project can be developed. Architect They space plan and design the building in accordance to the brief created by the developer. They in some instances also help to investigate the sites constraints both in accordance to the development plan and shape of site. Engineer They make sure that the building lives up to the building code regulation both concerning structural properties (making sure the building stands) and in accordance to building climate, which refers to lighting and heating etc. Lawyer They apply their legal skills in reference to transactions and possible disputes, but also in analyzing which possible laws or restrictions the plot of land entails in the due diligence analysis. Construction company They take the material from the architect and the engineer and build the property. They usually employ a series of sub-contractors to do specific tasks in the construction process. Real estate agent They make sure that the building is sold or leased and are relevant in the marketing of the new building as a product in the space market. Asset manager When the property is constructed, they manage the tenants, the building and the grounds of the properties on a day-to-day basis. This was a simple overview of the different actors in the real estate game, which are all essential in creating the build environment as we know it today and as we will know it in the future. We are going to go through a diagrammatic example of how the relationship between the actors could be in a simple development project. In a later article we will go through the different phases more in-depth. The process is divided up into three phases *simplified. IDEA & PLANNING- pre-construction In this phase the real estate developer has seen an opportunity to create a new property. The developer contacts private lender/ institutional lenders and bank(s) regarding financing. The developer contacts architects and engineers to design the property. The developer contacts the municipality about his plans with the development. The developer contacts one or several real estate agencys to gain knowledge about the market and about branding for the property. EXECUTION- construction The developer hires a construction company to build the property. FINISHED PRODUCT- post-construction The developer hires an asset manager if the development is to be held in his or her own portfolio; otherwise, it is sold off to a professional asset manager, who then takes over the building into their portfolio. Thank you for reading.