What is Opportunistic Investment Strategy?

    Investment properties using the opportunistic strategy require significant development or redevelopment to establish a stable cash flow and to optimise the investment.

    What is Opportunistic Investment Strategy?

    Investment properties using the opportunistic strategy require significant development or redevelopment to establish a stable cash flow and to optimise the investment. These properties typically have a low occupancy rate and may even be vacant when acquired by the investor, with complex business plans to maximise the returns for the property through refurbishment or more effective property management. Therefore, the opportunistic investment strategy is the riskiest strategy, compared to the core, core plus and value-add strategies.

    Whilst opportunistic investments hold a high degree of risk, they also provide investors with the highest potential for returns. Since properties using the opportunistic investment strategy have little to no cash flow at the beginning of the investment, the investor has to rely on large loans and employ significant leverage, with higher interest rates and less desirable conditions on the loans. However, opportunistic properties can experience the highest growth in value through capital appreciation.

    Examples of opportunistic investment strategies

    Properties that employ an opportunistic investment strategy typically fall within one of the following three categories:

    1. Redevelopment

    In a real estate redevelopment project, an investor acquires an existing building to be repurposed through adaptive reuse or urban infill. With adaptive reuse, an existing building is adapted for a purpose that it was not originally designed for.

    For example, a warehouse may be converted into an office space, with some redevelopment of the interior to make it better suited for its new purpose, without the need to construct a new building entirely. With urban infill, the vacant land area within a built-up environment is redeveloped to fill in the gaps within the community.

    2. Ground-up development

    With a ground-up development, the investor acquires vacant land and constructs a new building. These developments may be purpose-built to suit a particular tenant, who has a lease agreement for the property immediately after the development is complete. Alternatively, the developer may build a property, with the notion that demand for the property will spur occupancy of the property.

    These ground-up developments provide the investor with more flexibility to design the property, obtain permits and cater to the needs of the market to make his future cash flow more stable. However, a ground-up development may take a significant amount of time to complete, during which no cash flow can be established. Thus, the onus lies on the investor to ensure that he has the necessary capital to see the project through to completion, fulfill debt obligations and provide the targeted returns.

    3. Distressed asset

    With a distressed asset, the investor acquires the real estate asset at a heavily discounted price. Such properties have low operational cash flow and are underperforming due to different physical or administrative issues. It is up to the investor to identify these issues and implement a plan to resolve them. It is likely to require massive renovation to make the asset more attractive to future tenants or buyers.

    The distressed asset may also be struggling with income and expenses, which requires significant financial restructuring or negotiation such that its cash flow is resolved and debt obligations fulfilled to form a viable investment.

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    Pros of opportunistic investment strategies

    1. Higher returns

    Opportunistic properties can typically be acquired at relatively low prices, and refurbished to increase their value. This provides investors with higher profit margins, provided the cost of refurbishment is kept low. Properties using the opportunistic investment strategy usually have a target internal rate of return (IRR) of 15% to 25%, higher than the average IRR of core, core plus or value-add properties.

    Apart from capital appreciation, opportunistic properties can also generate returns through rental revenue after they have been optimised. This can provide investors with a stable cash flow over the remainder of the investment period.

    2. More control over the property’s development

    With opportunistic property investments, the investor or developer has more control over the development of the property. Therefore, the investor can plan to develop the property for a specific use, based on the level of demand and the corresponding potential returns for the property type within that particular geography. This allows the investor to apply his expertise and determine which property type has the highest potential returns and develop the project accordingly.

    Cons of opportunistic investment strategies

    1. Highest risk

    Investing in properties with the opportunistic investment strategy holds the highest risk, such as construction risk, lease-up risk and cash flow risk.

    The construction phase is a large part of opportunistic investing, which entails construction risks that affect the success of the project. When this phase is complete, there may be a lease-up risk, whereby the investor cannot attract enough tenants to achieve an occupancy rate above 90%. In this instance, the property may not be generating sufficient income to meet target returns, posing a risk to the viability of the investment. Finally, as opportunistic investments come with little to no existing cash flow, the investor would have to seek new tenants since there are only a few or no existing leases to renew in the new property.

    2. Highly leveraged

    Since opportunistic investment properties require major development or redevelopment, this involves a large input of time and capital. The investor often has to leverage significant debt to cover the development and operating costs whilst the property is not generating revenue. As such, there is a financial risk if the property is not able to generate sufficient revenue to cover its highly leveraged debt obligations.

    3. Longer investment period

    An opportunistic investment property tends to have a longer investment horizon, given the additional time required for the construction or development phase, which may lend added risk to the investment. The development phase may extend from a few months to a few years, with any changes in the market during that time potentially posing a risk to the investment. It is imperative for the investor to have enough capital to last throughout this phase, whilst having low liquidity on the asset until its completion.

    In conclusion

    Property investing using the opportunistic real estate investment strategy can be a good investment option for experienced investors who have the resources to acquire and carry out such a large-scale real estate development project. Investors should understand the high risk-return profile of opportunistic investments and determine if the investment type is suitable for their risk appetite, as well as its role in diversifying their real estate investment portfolio.

    The opportunistic real estate investment strategy tends to be more suited for investors who have a high risk tolerance and who seek longer investment horizons. However, investors who are well-versed in real estate investment, particularly in distressed assets, may find opportunistic real estate investing as an ideal way to optimise their investment returns.

    Alternatively, less experienced investors may also invest in opportunistic real estate without being disadvantaged by their lack of expertise, such as investing indirectly through real estate investment trusts (REITs) or directly through real estate co-investing.


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    Disclaimer: The information and/or documents contained in this article does not constitute financial advice and is meant for educational purposes. Please consult your financial advisor, accountant, and/or attorney before proceeding with any financial/real estate investments.