Particularly with the volatility in US markets over the past 10 years, real estate has become a much safer investment than the stock market or treasury bills. With the growth of REITs, this type of investment is finally accessible to the everyday investor.
Instead of saving money away in a bank, real estate has become a go-to investment strategy. With inflation, your money is losing its value, so a $10 bill in 2015 will not hold the same value in 2045. The US government aims to raise inflation 2% annually, but the value of a real estate asset on average increases by 3% annually.
Within this growing investment strategy, there are three major types of investment fund approaches. Each fund type offers different levels of security and returns.
1.Value-Add: This type of property will require some strategic asset improvements and changes. Considered the balance between “core” and “opportunistic,” this investment has medium risk, but the returns can be great.
2.Core: A good property with relatively minor development changes. This is a “safe” investment move, but, with a smaller leverage on the property, the investment group’s returns are smaller.
3.Opportunistic: This is the riskiest type of investment; often, this property is a “gut-job” and requires major changes. With a high-risk, high-reward value, some investors target run-down properties for this big flip.
One of the most common types of investments is a REIT, or real estate investment trust. This type of organization, modeled after mutual funds, finances or owns its own profitable real estate through a diverse set of investors. Most REIT stocks are traded on the market, but there are also private and public non-listed REITs available.
The two major types of REITs are:
REITs were created in 1960 to make real estate investments accessible to the average investor; with a number of US policies signed to support their growth, they have steadily risen in popularity. REITs offer an accessible way to invest in real estate – by purchasing stocks – with long-term capital appreciation. Shareholders earn pro-rata shares of profits as the asset value increases without the risk of buying and selling properties. Since REITs must distribute 90% of their earnings, the shareholders have a good chance of increasing their asset value as they hold their shares.
REITs have grown rapidly in the past decade. Remaining resilient during the 2008 economic crisis, REITs have grown from 98 securities in 2005 to approximately 300 publicly traded REITs in the US today. Publicly traded REITs had a combined equity market capitalization of more than $900 billion in value in 2014, while over 1,100 US REITs filed taxes in 2014. However, this value ranges with the market, and can follow the same trends.
While REITs have garnered much of the spotlight recently, there are other major real estate investment types. Institutional investors are also turning to real estate as a sound investment opportunity for their clients.
Financial institutions purchase real estate as part of a wealth management platform. Organizations such as Morgan Stanley and Merrill Lynch allow clients who want to diversify their own financial investment portfolio to pool funds and invest in particular properties. This sort of real estate investment will allow personal assets to grow with the increase in property asset value.
Insurance institutions purchase real estate to manage their liabilities far into the future. They also offer loans to real estate investment groups to help them finance their purchases. According to Hagan Dick, Assistant Vice President at Walker & Dunlop’s Atlanta office, there’s a significant rising demand for commercial real estate loans and he expects this demand will continue to rise.
Private equity groups invest in real estate as a wealth fund to gain additional profits. Groups such as Shorenstein utilize funds from large investors, institutional investors, or endowments that fit a particular core financial standard to invest in carefully selected properties. These are closed funds, so the private equity group will collect funds, invest, and then close the deal.
Regardless of the type of asset or investment vehicle used, all institutional investment groups are focused on the bottom line. They want to increase their property value while decreasing expenses. For many on-the-ground operators, this means decreasing their operating expenses (OpEx) to increase their net operating income (NOI). With the rising cost of utilities, property managers and engineers have turned to new technologies like energy management systems to identify the retrofit and upgrade projects with the biggest returns.
While the return on investment for these moves may provide immediate value for the owner, they often provide a much greater long-term return. Over a 5-10 year span, the new HVAC system that cost $30,000 may cut back on OpEx by $50,000, thereby providing $20,000 in value annually. Plus, the increase in asset value with a new HVAC system and a new EMS can provide even greater resale value.
No matter the kind of investment or risk involved, everyone is looking for a return. And real-time energy management can provide just that.