Real Estate Investing: Institutional Investing Techniques
It was in the early 1970s that financial institutions showed interest in investing in real estate. The initial institutional investors were involved in mortgage debt and core private real estate, but as the market evolved, investors have a greater choice than before. Advances in private and public equity real estate have made it even more convenient for institutional investors to invest in real estate. Initially they were drawn to the core diversified investment strategies such as insurance companies investing pension funds in core real estate. This lured other financial institutions such as private institutions, foreign investors, commercial banks and other institutions such as savings and loan banks to invest heavily in real estate too. This sudden influx in capital crashed the real estate markets, causing desperate sales at under value prices resulting in heavy loss.
Institutional real estate investing styles are broadly classified as core, value-added and opportunistic. Core real estate investing is a low risk, low returns kind of property and is usually a long-term investment. More people prefer core style as it offers a high-income yield, is stable and offers an inflation hedge. Institutes prefer to invest in class A type of buildings with no leverages and as little capital requirement as possible. They seek metropolitan areas, as the degree of liquidity is high in such areas. The liquidity constraints are taken into consideration while institutional investors invest in office, apartment, retail or industrial sectors of real estate. They usually use a buy and hold strategy while investing in core real estate. These properties are accepted by the institutions and held under fiduciary management. The fund managers buy larger, newer buildings located in fast developing areas; the tenants are selected with care and offered long-term leases. This makes it a very attractive and high yielding investment for the investors. Office properties are however considered very volatile that also require a larger amount of capital while investing.
Industrial properties are investments that are more popular as they are less volatile and need less capital investment than office properties. Investors look for easy access to airports, ports, stations or interstate highway etc for easy movement of goods. Apartment are more responsive to changes and require less capital investment too as they are not capital intensive, have a high degree of liquidity, lower transaction costs and cash flow are its main attractions to institutional investors. Retail properties are highly capital-intensive; demographics play a very important part in the selection of the property. Value added properties are less liquid than core properties and initial cash flow is usually negative. This reflects to the rehabing of properties. Opportunistic investment strategies refer to the practice of buying properties in distress sales and making a profit.
These are some of the institutional investing techniques.
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