Deep Value Real Estate Investing
“We look for mispricing due to an overreaction” Seth Klarman
Our focus on real estate and our preference for emerging markets is based on where we can find the largest gap between price and value in times of distress or market changes. In times of distress, particularly in emerging markets, we find a lack of liquidity and a higher cost of capital than during normal times. This unique time in specific markets can create significant pricing gaps, purchases at discounts to replacement costs, and high cash yields.
Our Deep-Value Orientation has the following pillars
Focus on Risk First – When looking at an opportunity, we start off with its risk. We try to understand first where an investor can get hurt before we determine how much said invertor can gain.
Purchase below replacement costs – Protection of downside via purchases below replacement costs allows for going-in cap rates to be improved in a better market environment.
Optionality in Returns – We work to find opportunities that have the opportunity to juice returns post-purchase. This may be through additional available square meters to build, strong going-in yield combined with vacancy to boost returns, a unique demand story, or a specific change in the asset that can create additional upside.
Cash Yield Spread – We try to purchase assets at a 100 bps to 300 bps cash yield spread to what assets are trading at that time in the market. We do this through a rapid ability to close and often an all-cash closing. We often lever after closing if an all-cash closing can create a competitive advantage and better going-in yield.
Comparable Assets – It is very difficult to make money if an investor purchases incorrectly. If an investor cannot sell the asset, the best purchase does not generate a healthy return. InDev focuses on comparable transactions on a given asset in the current distressed market environment. We always work to make sure that we have a current yield spread and a purchase price “per pound” that is value-driven based on today’s assets.
Sponsor Capital – InDev only works on transactions where a local asset manager is active in the investment strategy and is putting up between 5% to 15% of the capital. We find this alignment critical.
Deal Sources for Deep Value
Our investment opportunities are usually the result of motivated sellers in the following situations:
- Liquidity Issues from the seller (corporate or individual)
- Forced Selling based on bank pressure
- Legal Challenges
- Distress in seller’s operating company
- General Distress
- The commonality is a motivated seller