As outlined in the linked article below, as the real estate market bottomed out, investors starting buying lower risk stabilized core assets. Data collected by Costar suggests that this market has been overbought, which is proven by stabilized core assets being within 5.5% of their 2007 peak. Value added assets have only recovered to within 25% of their 2007 peak, which leaves more room for their price appreciation, and yield growth. With a flooded amount stabilized core assets on the market, we believe there is money to be made in the value added tier of properties.
Excerpts from the Article:
A recent report by CenterSquare Investment Management argues that the search for value in real estate has shifted to a new phase in which investors must create property value through astute leasing and management.
“While 2008 through 2011 was largely an ‘era of acquisition’ in which lucrative opportunities were abundant for anyone with available capital, we are now in an ‘era of execution,’ in which investors must create value and execute strategically to achieve attractive risk-adjusted returns,” according to P.J. Yeatman and Jeffrey Reder, private real estate executives for CenterSquare (formerly Urdang Capital Management).
Since 2009, investors have largely flocked to acquire stabilized core assets to the point that Yeatman and Reder believe current yield is now overbought and total return assets are relatively underpriced.
With improving fundamentals spreading across more markets, the real estate cycle has reached a point where investors can create arbitrage from the “mispriced perception of risk” that exists between stabilized core and value added assets, the CenterSquare executives said.
“Due to the combination of a high cost basis and a lack of opportunity for increased yield, stabilized core assets carry greater risk than is currently perceived,” Reder and Yeatman wrote. “In contrast, transitional value-add assets can be acquired at an attractive cost basis in today’s market because they are perceived to carry greater risk.”
Citation and link:
Drummer, R. (2014) Investment Advisor Sees Value Added Real Estate Gaining Favor, Costar, Opportunity Awaits, pg. 1