What is the purpose of asset re-positioning?
1. Asset management is the process of controlling the finances and managing the types of real estate properties. The purpose of asset management is to generate the market value of the property and return on the investment. This means asset management serves the purpose of being cost-effective, mitigating risks and liabilities and generate higher revenues from the properties (Campbell, Jardine & McGlynn, 2016). An asset manager’s role is to provide maximum return to the investors and drive themselves towards creating a value for the investors/owners.
2. Value creation is referred to creating a value for the products or services of any business in the eyes of the end-customer. The value can be considering various diverse factors such as the economic situation, the location of the business/property, market conditions, and demand/supply and tax/legal regulations (Bjørberg, et. al., 2015). Value cycle is mostly dependant on the creation of value for the property and on the real estate market condition. Depending on the value created, value cycle affects the rental rates and property prices by interaction. Demand drivers refer to the driving forces that help in persuading the customers and increase the demand for real estate properties and selecting the desirable property location. The drivers include the population growth, economic growth, employment rate, property price level, and transportation.
3. The investors in real estate can be categorized on the basis of their investment motive and the legal entity they are. Under the investment potential investors can be the speculators, end image of an investor in front of customers in order to dupe them (Bhardwaj, Gorton & Rouwenhorst, 2016). End users are the category of investors who purchase the properties to settle to lead a better life. Long-term investors are generally the big corporations which earn a good amount of money from investing in real estate market. Individual investors invest in real estate properties and hold unlimited liability. Institutional investors finance themselves by issuing long-term bonds (Smith, 2015).
4. Core real estate investments are generally properties that generate good value, located in major cities with high occupancy by residents and provide stable revenue from them. The advantage of core real estate investment is that it helps in securing the stability in cash flow. The disadvantage can be the high pricing and lack of diversity in the investments. Also, this may not be a suitable investment for risk tasking investors as there is low volatility in these investments. Institutional investors such as insurance companies participate in this of investment (Conklin, Diop & Qiu, 2016).
Non-Core real estate investments are properties located in secondary cities and are based on high risk, high leverage, and the operations related to the renovation and improvement of the properties. On the other hand, if the business plan stands out to be complicated it can generate a lower income and higher risks will be involved with the business plan (Conklin, Diop & Qiu, 2016).
5. For a portfolio, risk management is usually evolved from the diversification of the type of asset mix or non-concentration on only a single type of region or property. This is known as adjustment of risk. Hence, a vital concept in the return on investment is the consideration of the asset class’ risk and the synergy with other classes of assets within the portfolio. So, the amount of allocation of capital to every size as well as the class of portfolio and the risk diversification level of each of the properties should be taken into consideration for the management of portfolio (Tsopanakos, 2018).
Value Creation in Real Estate Investment
6. The primary issues associated with the Village Market real estate is that poor property performance associated along with the unwillingness of the owner to commit additional equity and willingness to offer dead in lieu. The issues was a resultant of the loan that was associated with the real estate property. The default of the loan was in due time due to the owner’s failure to repay the amount.
7. Management Plan is the annual business plan to create the financial and operating strategy to manage the operations of the property. Alongside the management plan, a budget is also important which will forecast the estimated incomes and expenses for the upcoming year, compare investor’s anticipated return on investment and project the cash flow (Roper & Payant, 2014). The asset manager has to prepare variance reports on a monthly basis in order to compare the actual performance with the budgeted performance.
As an asset manager, I would create a separate account as reserves for the expenses to be incurred for the aging property. The deferred maintenance and capital needs will be met first as neglecting these aging properties might pose huge risks in the near future.
8. Marketing and leasing process refers to the process of marketing the available property and carrying out the leasing activity before handing out the property to the tenant. It is the responsibility of the property managers to approve the right applicant to move into the client’s property. The asset manager’s role is to make sure that the leasing and marketing process is carried out smoothly. Leasing professionals carry out the leasing activities, the process of lease negotiation, review the legal terms and other activities. A property manager is responsible for the maintenance of the property.
SNDA refers to Subordination, Non-Disturbance, and Allotment. This is an agreement signed by the landlord, tenant and the lender of the property. This agreement means that the control can be taken from the landlord by the lender in case the building goes bankrupt. In this case, the lender will honor the tenant’s lease. As an Asset manager, I will allow SNDA and Co-tenancy clauses in the lease agreements as it will attract more and good quality tenants.
9. The tenant has been paying the rent on time from the past 9 years and there has been no such complaint against the tenant. If I consider this and understand the difficulty of the tenant, I would manage the lease by inquiring about the property’s loan terms, DSCR ratio and the cash flow statement. I will check the amount of security deposit the tenant has paid while renting the property and would discuss with the owner to understand the difficulties faced by the tenant and lessen the rent for a temporary period of time. The tenant can also bring in a new tenant if possible to share the rent and put the co-tenants name in the lease. My motive would be to resolve the difficulty of the tenant either by lowering the rent by locking in them at market rent for years or look for a new tenant. Nevertheless, looking out for a new tenant would carry certain expenses. Hence, I would keep the rent at an optimum level without breaching the DSCR ratio and breaching the positive cash flow.
10. Asset repositioning is an investment strategy used by real estate companies to add value to the asset or the property. The owners provide substantial value to the property either by changing the position of the property in the marketplace, changing the operations, the physical appearance of the property or the general view around the property.
In order to achieve a successful repositioning, real estate companies should try to invest in sustainable energies. The companies should take measures to conserve energy by investing in efficient sustainable strategies and focus on marketing strategies to attract prospective tenants should be incorporated. The buildings or the properties can be made by holding aesthetic values and upgradation (Flanagan, 2014).
Reference:
Bhardwaj, G., Gorton, G. B., & Rouwenhorst, K. G. (2016). Investor interest and the returns to commodity investing. Journal of Portfolio Management, 42(3), 44-55.
Bjørberg, S., Larssen, A. K., Temeljotov Salaj, A., & Haddadi, A. (2015). Optimizing building design to contribute to value creation. In IPMA World Congress (Vol. 2015).
Campbell, J. D., Jardine, A. K., & McGlynn, J. (Eds.). (2016). Asset Management Excellence: Optimizing Equipment Life-Cycle Decisions. Boca Raton. USA: CRC Press.
Conklin, J., Diop, M., & Qiu, M. (2016). How Do Firms Finance Non-Core Investments? Evidence from REITs.
Flanagan, T., (2014). Smart Repositioning Strategies for Real Estate. Retrieved from: https://www.marketsmedia.com/smart-repositioning-strategies-real-estate/
Roper, K., & Payant, R. (2014). The Facility Management Handbook. New York City, USA: Amacom.
Smith, E. L. (2015). Common Stocks as Long Term Investments. London, UK: Pickle Partners Publishing.
Tsopanakos, D. (2018). Risk Management in Real Estate What Keeps Real Estate Managers Up at Night? Retrieved from: https://www2.deloitte.com/content/dam/Deloitte/lu/Documents/realestate/reflexions/lu-risk-management-real-estate-08042015.pdf
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