8AUGUST 2024OPINIONIN MYProbably the most common asset that one can look at and feel on a day-to-day basis is real estate. This asset has historically been incorporated into the portfolios of many investors. However, in Latin America, there are underlying drivers that rule. The region has experienced the sophistication and technicality to manage it as a wealth management branch, and that is why when considering investing in this asset, relying on experts in the industry can be essential for a successful result.Those who seek to preserve their wealth, aspiring for liquidity and a bond-type risk-adjusted return, probably will choose commercial real estate investments, which means, renting an asset, and holding it until the sale is required. The fundamentals of the investment will focus on analyzing whether the stabilized cap rate (net operating income divided by the cost of acquisition) is the desired one if the area is the consolidated zone for the type of use if the demand exceeds the supply if the contracts adequately manage the risk of vacancy, maintenance, and operation or if the replacement cost has hedged inflation. Finally, if maintenance has been adequate so as not to incur corrective capex. There are more fundamentals to analyze, but these may be some of the most important ones.Commercial real estate investments have some attributes: periodic dividends, it is collateral against leverage, and perhaps a more noticeable one: the asset exists; and that tangible is going to have a salvage value, either for the land or for the replacement cost.On the other hand, those seeking higher returns can opt for real estate development. This option has an additional inherent risk: the asset does not exist; it must be built. However, this option is more likely to yield double digits and there will be those who seek to incorporate that risk into their portfolios.Unlike commercial real estate investments (more predictable cash flow assets), development is based on a hypothesis of future conditions, such as whether the spread between cap rates will be significant if the price of the land and the cost of construction are adequate compared to the price that the market can pay, if there will be the sufficient technical background for construction or if the permits will allow the development.Having mentioned some of the drivers of a real estate investment, probably the success of an investment is that the team has conviction. Do they understand the entirety of the components of this asset?Understanding that there are different uses is part of approaching the asset. A logistics center/warehouse is not comparable to a corporate office building or senior living, retail, hotels, and/or multi/single-family. Each of these has drivers and expertise for development, administration, and operation.In Latin America, the variability in the drivers between countries is important. Not too many decades ago, construction companies were the ones making real estate development (with their equity) by putting a markup on its cost or by leasing the asset. They will do that until they ran out of capital. Now there are developers, brokers, asset managers, private/public investment funds (REITs), property managers, and fiduciary actors, whose approach to real estate has upgraded from binary investments (leased or not leased with full ownership of the asset) to diversified investments (occupancy percentage all over a portfolio by partial ownership of the asset) and therefore accomplish investors yield-liquidity necessities with the correct asset (e.g. Insurance companies or retirement funds). By Gabriel Gaete, Investment Unit - Head of Financial and Administrative Operations, SEMAICASMART INVESTMENTS IN REAL-ESTATEGabriel Gaete
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