Thoughts

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Unlocking Value in Short-Term Real Estate Investments Through Sustainability

Thoughts

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    Ed Gabbitas

EVORA Global has read with interest commentary that commercial real estate strategies offering higher yields, at a higher risk, will likely move first and fastest as the real estate market seeks to deploy built up capital. This trend is being driven by investors demanding higher returns in a challenged market. 

When the ‘risk-free’ rate (represented by the yield of a 10-year U.S. Govt Bond) is relatively low, (e.g. 1%to 2%), a typical Core Fund return of 6% to 8% is an attractive risk adjusted return to many investors. However, when the risk-free rate rises, the dynamics change. The risk premium of an asset is the additional return investors expect to earn for taking on additional risk beyond a risk-free investment. When the risk-free rate is 4.5%, the premium for Core real estate investments returning 6% to 8% shrinks to just 1.5% to 3.5%. This smaller premium is considered insufficient to compensate investors for the risks associated with typical real estate investments. 

As a result, multiple industry outlooks expect to see a shift away from Core and Core+ strategies, towards higher yielding strategies of Value-Add and Opportunistic funds.

EVORA has extensive experience working with a number of Value-Add funds, providing sustainability advice across capital raising, capital deployment and management, and ultimately in achieving exit goals. A common misconception among many clients is that sustainability, decarbonization and / or ESG are not applicable due to the short hold periods. However, there are multiple instances that back up why Value-Add funds are perfectly positioned to capitalize on sustainability initiatives. 

The fundamentals of a Value-Add strategy are to enhance a property’s value by improving its income, decreasing expenses, or both. Four common approaches to achieve this are set out in the download below. 

Ed Gabbitas
Founder, Head of North America, EVORA Global