However, when relying on a single, secondary-grade asset, the risks tend to pile up quickly. This is not to say such a strategy is unworkable or that all of the recent offerings lack merit. There are even managers out there who specialise in secondary-grade assets whose skills we hold in high regard. Currently, however, we see a glut of these offerings whose risks are seemingly being glossed over by the argument that investing at the bottom of the cycle is a cure for all evils.
Investing in commercial real estate is by its very nature a long-term proposition. Since no-one can accurately forecast the future over the timeframes typified by real estate cycles, winning strategies are those that can adequately structure themselves to withstand downturns and maintain operations during the hard times that follow before the inevitable recovery takes hold. Successful investments in this sector need to be a combination of appropriate matching of a building’s quality, lease profile, debt maturity, investment horizon and management’s ability and strategy. Too many recent offers address only some of these aspects.
With the real estate market now having largely bottomed out and initiating recovery, 2011 – as with last year – remains a key phase offering cyclical opportunities for discerning investors. Strategies are far more effective (and robust) when implemented at the bottom of the investment cycle. It must be appreciated, however, that market recovery should not be confused with “foolproof” investments.
The sector recovery is not without risk and any investment opportunities must be approached with careful planning and assessment at an execution level as well as with a view to appropriate portfolio construction. Zenith is of the opinion that the unlisted direct property sector retains significant merit for inclusion in a balanced portfolio when participating with strong management, appropriate structures, prudent leverage and quality assets. Investors and fund managers must, however, take to heart the lessons of the past cycle and plan accordingly.
Despite the inherent qualities and attributes offered by exposure to real estate as an asset class, history continues to teach us that the acquisition of quality assets cannot compensate for poor investment structures or inappropriate decision-making. When enacted prudently and when taking advantage of cyclical opportunities, however, the rewards are well worthwhile.
Dug Higgins is a senior investment analyst for Zenith Investment Partners – www.zenithpartners.com.au
