Dec 18, 2023
We have spoken to fund managers about the current state of the real estate market. There is both uncertainty and opportunity in the air as we navigate what we believe will be the gradual reopening of the economy. Property values have fluctuated widely depending on the sector, and the impacts of interest rates and changes in buyer demand are still unfolding. Through all this change and uncertainty, one theme has risen to the surface - now may present a unique window of time to launch a new real estate investment fund. In this post, we will explore several reasons why you may want to consider starting a fund at this moment, despite the ambiguous conditions.
The real estate market has been facing some challenges lately, with high interest rates, low sales volumes, and rising cap rates. But as any seasoned market participant knows, things in this industry can turn around quickly. It's not uncommon for markets to surprise us with the speed of their recovery and rebound. It’s important to keep an eye on market trends and remain optimistic. After all, anything can happen in real estate - usually when we least expect it.
If you're thinking of setting up a fund, it's crucial to understand that it takes time and preparation. You don't want to wait to begin the process until after the markets have already started to recover and demonstrated an upward trend that is clear for everyone to see. By then you will have likely lost any first-mover advantage. Instead of focusing on where the markets are today, you need to keep your eye on the turning point that we believe is likely to happen in the near future. This will allow you to time your launch as closely as possible to the moment when the market is just starting to recover. While there is always a risk of unanticipated events that impact investment outcomes, careful consideration and planning can significantly contribute to achieving the desired outcome. By remaining proactive and keeping an eye on the horizon, you can help your fund to navigate the complex and ever-changing financial landscape with confidence.
As with any investment, the world of real estate requires careful consideration and strategic planning. While each property may possess unique qualities that set it apart from others, real estate as a whole remains a commodity product. This means that investment managers must navigate the market as price takers, not price makers. It's a challenging and dynamic environment, but one that can bring great rewards for those who approach it with care and diligence. Through a combination of industry expertise, data analysis, and smart decision-making, investment managers could optimize returns, mitigate risk, and build successful real estate portfolios.
Real estate investment manager success usually relies on purchasing assets at prices below their intrinsic market value. Why? Because they understand that they are price takers, not price makers. Real estate prices are largely determined by supply and demand, making it difficult to predict and control the market. However, by buying below market value, investors can set themselves up for success when the market eventually reverts to the mean. In this way, “making money on the buy” can be the best and safest way to make money in the world of real estate investment. By focusing on buying low and selling at market, real estate investment managers can mitigate risk in a challenging and complex market.
The current state of the market is potentially creating a "fish in a barrel" scenario. During times of market dislocation, underpriced assets become more common, while buyer competition becomes less intense. This means that investment managers have a better chance of "making money on the buy." It's a chance to capitalize on assets that have been undervalued due to current market conditions. This opportunity should not be ignored, as it only occurs once per cycle, and real estate cycles tend to last a long time between price corrections. By seizing the opportunity, an investor can turn these conditions to their advantage and make a profit on the investments they make.
When it comes to real estate investing, we all want to make use of positive leverage wherever we can. But in times of market dislocation, having cash on hand becomes crucial. Without it, the opportunities that are out there could be hard to get. This is where a fully capitalized fund comes in. If you are able to raise capital for your fund, it allows you to have the cash you need to make moves when others can't. However, it's important to remember that building up a fully capitalized fund takes time. If you wait too long, you might miss your chance. Now is the time to start coolly evaluating the markets and consider whether you are in a position to set up a fully capitalized ready-to-go fund.
Nothing in this blog is or should be construed as investment advice or an offer or solicitation of offers of investments. Both Real Estate Investments and Securities offerings are speculative and involve substantial risks. Risks include but are not limited to illiquidity, lack of diversification, complete loss of capital, default risk, and capital call risk. Investments may not achieve their objectives. Investors who cannot afford to lose their entire investment should not invest in such offerings. Consult with your legal and investment professionals prior to making any investment decisions.