SiiLA ACADEMY Advanced. When and How to Invest to Maximize Returns and Minimize Investment Risks

This week marked the commencement of SiiLA ACADEMY Advanced classes—a course meticulously crafted and delivered by distinguished commercial real estate market leaders, tailored for industry professionals eager to deepen their knowledge and acquire intelligent real estate analysis tools.

During the inaugural session of SiiLA ACADEMY Advanced, Alejandro Delgado, Country Manager Mexico at SiiLA, delved into advanced investment concepts within the commercial real estate market. He discussed strategies for capitalizing on opportunities to maximize property profitability.

In this article, we'll delve into two fundamental concepts essential for understanding when and how to invest to generate returns and minimize investment risks. We'll explore the "investment horizon" concept and four investment types: "core," "core plus," "value-added," and "opportunistic."

Investment Horizon: How Long to Invest and What to Expect at Each Investment Stage?

According to Alejandro Delgado, the "investment horizon" represents the period during which an investor plans to hold an investment before withdrawing their capital or selling assets. This timeframe depends on the planned investment duration and the investor's risk tolerance.

The investment horizon is categorized into three levels: short-term (1-3 years), focused on maintaining liquidity and capital preservation with minimal returns; medium-term (3-10 years), characterized as a phase where investors aim to strike a balance between investment security and risk for better returns and capital growth; and long-term (more than ten years), when investors are willing to assume more risk in pursuit of higher returns, investing in stocks, real estate, or more complex financial instruments.

Understanding investment horizons is pivotal in the commercial real estate market, as it defines investors' profitability goals and strategies. It provides essential guidance on the period over which an investment is planned to be held and the expectations in each period. This allows investors to align their decisions with their financial goals and risk tolerance, ultimately contributing to maximizing returns while minimizing risks associated with commercial real estate investment.

Types of Investment: Models for Maximizing Income and Reducing Risks

Before investing, it is crucial to determine the type of investment to pursue. The commercial real estate sector has four investment categories, each with its specific focus and strategy.

1.- Core Investment. This pertains to investments in stable, high-quality properties to generate predictable income and maintain long-term value. An example would be acquiring a highly occupied or stabilized office building.

2.- Core Plus Investment. It aims to balance maintaining the stability of "core" investments and increasing their potential value. This involves acquiring properties with stable tenants and identifying and capitalizing on opportunities to improve properties for higher returns.

3.- Value-Added Investment. As the name suggests, this level of investment focuses on adding value to a property through investments in renovations, energy efficiency, changes in land use, or financial restructuring, among other examples. Unlike "core plus" investment, which seeks a balance between stability and value increase through strategic improvements, "value-added" investment entails significant investments to transform and substantially increase a property's value.

4.- Opportunistic Investment. This type of investment centers on seizing opportunities during specific moments or unique situations. Examples include purchasing undervalued properties, responding to regulatory changes affecting the real estate market, or capitalizing on favorable economic cycles.

Selecting the appropriate investment type depends on individual objectives and risk tolerance. Deep knowledge of these categories is essential for real estate professionals seeking to maximize their profitability and minimize risks in a highly competitive and dynamic market.

In the upcoming sessions of SiiLA ACADEMY Advanced, we will explore relevant topics such as trends in industrial property construction and marketing, real estate valuation's impact on investment profitability, capital markets, cash flow, discount rates, and the evolution of the retail market in Mexico.

For more information on these subjects, explore SiiLA REsource or contact us at contacto@siila.com.mx.