European value added investing: leveraging structural and cyclical real estate opportunities

Abstract

PurposeThe demand for value added investment in the European real estate market emerged in the mid to late 1990s and over the past decade has grown rapidly as a preferred investment style. Recent evidence suggests that investor appetite for value added products is set to intensify further. The purpose of this paper is to consider value added investment in the context of the wider market and in particular considers the rationale underpinning the current surge in demand. The paper explores the core components of its risk return profile and puts forward a strategic investment framework for European value added investment.Design/methodology/approachThis paper develops a three tier filter to enable the classification of investment style. First, the risk parameters of the key investment characteristics are considered; second, the degree of risk exposure experienced on any one dimension and finally, the combination of such risks taken at any one time.FindingsThe key findings of this paper are: the shift in capital towards real estate at the beginning of the decade brought a new investor audience to the sector. Alongside the existing investor base, their growing experience in the sector, together with steep pricing competition for core has increased their risk appetite within the sector.Originality/valueThe paper emphasizes that investment strategies focussed on delivering true risk adjusted value added returns must be capable of identifying structural change, evaluating its implications for the real estate market and analysing its impact on current and future value.