I hope that throughout this book it has become clear that one of the best investment strategies in real estate is the value-add approach. Value-add opportunities exist everywhere, even more so in advanced economies like the United States or the United Kingdom. You can come across them by walking or driving through neighborhoods, speaking with brokers and friends in the real estate industry, checking listings online, and using other methods. They basically consist of repositioning a property by improving the operational strategy—that could mean increasing occupancy, lowering operational expenses, increasing rents to market (in case they are lower than market), creating new income streams from unused spaces, and more. The asset will be worth more when you manage to increase the net operating income (NOI). In some cases, a value-add approach can also be a focus on purchasing poorly leased properties in good locations, or properties that have substantial near-term lease rollover. An important metric when you implement this strategy is to be cognizant that you are buying at a similar price (or below) replacement cost.
When you take the value-add approach you take on some risks; however, you don’t have to deal with the permits and licenses risk or the construction risks, two significant risks, especially for someone with only a few years of real estate experience. The “construction” risk in value-add is usually associated with light renovations, such as capital improvements (i.e. new walls and a terrace), certain structural repairs, painting several parts of the building, and so on. When you surround yourself with experienced professionals and incentivize them correctly, these risks are very manageable.
Thor Urbana, a large real estate development firm, identified a specialty retail center on a high street in southern Mexico City that had little foot traffic and a unique upside potential. The owners at Thor Urbana walked the neighborhood, the street, and the property and noticed that although the property was 90 percent leased, there was unrealized upside potential. The property was not efficiently designed, it had unused spaces that could generate income, little foot traffic, and the center only had luxury tenants (they might be great tenants, but they bring in little foot traffic).
Thor Urbana approached the seller, developed a friendly relationship, and quickly negotiated to take it off the market. The company performed a thorough due diligence, during which time its vast network with retailers—and its operating experience—enabled it to create a repositioning strategy for the asset.
After acquiring the asset, Thor´s strategy consisted of:
The results were as follows:
Total sales of tenants grew over 40 percent in a three-year period. As of November 2018, and after the implementation of Thor’s repositioning strategy, the asset has seen a + 300 percent NOI growth in three years in what was considered an already stabilized asset with a + 90 percent occupancy at the time of acquisition.
Realized Returns
Underwriting | Current Performance | |
Levered IRR | 17.4% | 40.5% |
Yield on Cost | 10.0% | 16.3% |