Real Estate Investment Process
Implementing a structured real estate investment process can be a key factor in achieving double-digit returns.
In general such a process includes, defining the framework of the investment strategy; translating this framework to particular property types, markets and locations to be targeted through thorough market research; sourcing and screening properties at the targeted markets and locations; thoroughly analyzing the feasibility and viability of the investment and the exent to which it meets return requirements, taking into account and creative financing structures that may allow for significantly higher returns; negotiating the more detailed terms of the transaction; and executing the transaction. In the case of development projects, the process further involves finding competent developers and operators and potentially structuring mutually beneficial partnerships; completing the project; managing it efficiently to maximize its value; and selling it at the appropriate timing in order to maximize selling price. Through this process, working with the right realtors,and consultants that are specialized in the markets and property types targeted is crucial for its success.
At the portfolio and fund level the real estate investment process is more organized and more strategically determined. First, the Advisory Board determines the broader framework of the real estate investment strategy and oversees the Investment Committee and Fund Management team with annual reviews of portfolio performance and approval of large transactions that are over a preset amount or percent of total portfolio. Investment Committee oversees and approves the portfolio setup framework, as well as Asset and Portfolio Management operations. Within this context the Investment Committee reviews semi-annually asset and portfolio performances, current and projected, for the whole portfolio and by category, such as property type, location, tenant industry etc.; reviews portfolio optimization recommendations and makes decisions regarding changes in portfolio mix in terms of property types and locations in order to maximize portfolio return prospects and minimize risk; sets and reviews risk mitigation processes both at the portfolio and at the asset level. Ideally, portfolio optimization recommendations should be based on the results of advanced portfolio analysis using reliable return and risk projections by property type and location (derived through advanced econometric and forecasting techniques) and modeling frameworks that draw from the modern portfolio theory.
The Implementation Committee executes the portfolio setup and structure, as determined by the Advisory Board and the Investment Committee. The acquisition department executes the portfolio build up process by screening properties available in the market to identify those that fit the Fund’s investment strategy, performing preliminary screening to select assets that will go through more detailed market analysis and feasibility study, negotiating transaction terms and financial structuring, preparing project documentation and analysis package to be presented to Investment Committee for final approval. Return and risk analysis by asset should take into account each asset's cash flow prospects, given current leases, stipulated rental rates, annual rent increases, expiration dates, probabilities of renewing, probabilities and time duration for finding new tenants for non-renewed leases, and projected market rents at which new leases will be signed and renewed leases will rollover. Lease renewal probabilities, time for finding new tenants and rental rate projections should be based on market vacancy rate projections, which provide a very good indicator of market tightness. Transaction closing, post-acquisition management and liquidation of the property in order to realize capital gains will complete the real estate investment process for a particular asset.
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