Commercial real estate offers a host of opportunities for savvy investors looking to leverage their capital into new holdings. Like all investments, these holdings can be broken down into various groupings based roughly on their relative risk and reward profiles. Though these groupings may seem straightforward, it helps to have them explained by someone knowledgeable in the field of commercial real estate investment. To learn more about the field, we turned to Christopher Linkas, a veteran of the industry. Read on for a look at his breakdown of the various types of commercial real estate, and the considerations for investing in each property type.
Before diving into his recommendations, let’s take a look at Christopher Linkas’ background and why he is well-placed to provide information on the topic. A veteran in the realm of investment, he has served as a European head of credit since November 2012. Currently based in London, he leads a team of twenty for his credit group, which is primarily responsible for opportunistic principle investments in the UK-Euro regions. Some of his regions of specialty include the United Kingdom, Scandinavia, France, Switzerland, Greece, Italy, and Germany.
Christopher and his team focus on a variety of investment topics in those regions, with their concentration applied to renewables, shipping, non-performing loans, real estate, leases, and corporate loans and securities. Before joining his current team, he operated out of New York while working for a credit and real estate funds business. During his time there, he headed their commercial efforts focused on opportunistic debt and North American real estate investments.
Three Property Types
There are three general property types of commercial real estate that investors seek out. The delineations between different kinds of properties are based on the risk to reward ratio they offer. In the following sections, we asked Christopher Linkas to break down these factors so that you can better understand the various methods of real estate investment.
The lowest risk method of investing in commercial real estate is to purchase what’s known as a core property. These properties are typically fully functioning commercial ventures that already have a well-established cash flow. They require little to no improvements as the property is already maintained to the appropriate standards. In essence, these properties are “turn-key” in that they only require you to purchase them and then you can immediately begin to receive the benefits of the business plan that is already in place.
Of course, as with any investment, along with low risk goes low reward. Since the value these properties can provide is immediately realizable in the form of existing cash flow, the price of these real estate ventures is typically commensurate with its potential earnings. That means the return on your purchase price will be lower than other property types and might be more in line with the types of returns you’d expect from a corporate bond or publicly traded equity.
From his dealings in the world of real estate investment, Christopher recommends these types of properties to investors who are planning to hold for an extended period. They are especially good for capital preservation since they are unlikely to lose value (Adapt.IO).
Value Add Properties
This second type of investment opportunity is a property that has some sort existing cash flow, but there may be extensive room for improvement in its business plan. This might mean that a building needs to be updated in order to command higher rents. Or perhaps the current management of the property is substandard and a greater focus in this area would likewise bring the promise of higher returns. In other words, though there is value present in the property, it requires some work for it to realize its full potential.
Linkas characterizes these investments as a moderately higher risk than core properties since they require input from the investor. If a business plan is formulated to increase cash flow, valuation can increase and produce a sizable return. However, there is always the chance that things may not proceed as planned and those returns may fail to materialize. That risk of failure is the underlying risk of the investment as a whole. Therefore, these properties are suited to those looking for a balance of risk vs reward.
The final property covered is an investment type that comes with the possibility of high rewards but at the peril of high risk. These properties are often without a current means of cash flow and may, in fact, be vacant at the time of their purchase. They will require a significant investment of capital and other resources in order to realize potential returns. If an investor can formulate and execute a business plan to turn such a property into a high-earning commodity, they will be rewarded with a sizable return on their investment. That supposition is risky, however, and therefore makes these types of properties suitable primarily for those who are experienced in the field and can anticipate a reasonable level of success in their undertaking.
The above advice from Christopher Linkas comes from a long career in the field of investment. What has left him particularly well placed to speak on these investment opportunities is his experience going from college directly into a recession. A graduate of Bowdoin College in 1991, he soon found himself in the middle of the savings and loan crisis. Though employment was scarce, he was able to secure a position valuing collateral from a variety of repackaged loans. Through this experience, he came to a deeper understanding of the risks investors take on while evaluating potentials commodities. That knowledge of risk vs reward is essential to his above classifications of commercial properties.
Though commercial real estate investment is a complex field with many considerations for those looking to profit, a thorough understanding of industry fundamentals is essential to achieving success. By reading the preceding advice from Christopher Linkas, one can begin to gain a greater appreciation of these investments and the risks they entail. If you have a predetermined level of risk you are willing to accept, consider seeking out investments from one of the three property types that best aligns with your business goals.
More about Christopher Linkas at https://register.fca.org.uk/ShPo_individualdetailsPage?id=003b000000LW8hfAAD