Has the market hit rock bottom or is now the time to buy? Korosh Farazad explains whether now is a good time to invest or not.
Following many years of housing prices soaring and competition steadily increasing, real estate growth has finally started to slow, likely caused by the cost of living crisis and mortgage rates that are continuing to climb. Year on year, real estate prices have seen rapid growth with The Land Registry saying they rose by 12.8% in May. So what’s the best move?
“Investing now will give you a higher value-add on the equity of your property once the market picks up again.”
A couple of the most common problems faced by inexperienced hotel investors that need to be highlighted are the following:
Weak analysis and underwriting practice can lead to unachievable target hotel operational KPIs and return metrics such as IRR and equity multiple.
Poorly operational management of the hotel can lead to unnecessary increased operating costs, which will hurt the owners’ profits.
The two situations above can ultimately result in significant losses in hotel investments.
Therefore, it is always recommended to assemble an experienced team of real estate asset management professionals with extensive experience in investment, development, and project management for the project’s success. A strong team can create value through investment and active asset management. For example, rebranding the hotel with a well-known brand and creating innovative design schemes by bringing award-winning architects and interior designers to refurbish the hotel can significantly improve key drives such as ADR and occupancy. This leads to an overall better positioning of the hotel against its competitors and substantially contributes to an overall increase in GOP and NOI. This can attract more travellers to the property and result in more significant returns and substantial long-term value to the investors.
The most important things to consider before investing in property
The first thing and one of the most essential key elements of every transaction that an investor should consider before acquiring an asset is the location. Is the surrounding area nice? What is the proximity to the main transportation links? Any other landmarks of the area that can increase the value of the property?
Next, what are the competitive advantages of the property that gives it a leg up on its nearby competitors? Does it have bigger rooms? Better F&B outlets and amenities? Higher quality finishes? These are some of the reasons that increase the willingness of the customers to pay a higher price to stay at the hotel and help outperform the competitive set.
Further, investors should understand the macro and micro economy well for the location they are considering investing in. For example, what is the upcoming supply of similar properties in the market in the next few years? Which assets could be regarded as direct competitors, and how are they performing? What is the market segment (breakdown between leisure and business travellers)? Is any rejuvenation happening in the area (i.e. new shopping centres, offices, or retail)?
Lastly, good real estate frequently has several upside cases and exit options. For example, acquiring planning permission to extend the number of rooms of a hotel asset or repurposing an F&B venue can drive the profits and value of the property up.
What is the best way to budget when investing in a property?
A project budget is the total estimated cost for every phase of a transaction. It is crucial as it helps set expenditure expectations, confirm funds are ready at the right time, and measure the performance. When it comes down to value-add transactions, the budget includes hard and soft costs, labour and material costs, OS&E, insurance, etc.
The best way to budget your Capex when investing in an asset is through the historical data from recent past projects, which are similar in terms of size and nature. The data will provide a more straightforward path which can lead to more precise/accurate estimates during the refurbishment or development period of the project.
Moreover, a good project manager and QS are also essential for managing your projected budget. Their primary responsibility is to manage and complete the project successfully within the estimated budget, time, and quality standards.
How has the pandemic changed the property investment industry?
In 2020, the COVID-19 pandemic severely affected all the real estate sectors on a global level. Most of the commercial real estate projects were delayed or abandoned. The hotel investment market plunged due to a sharp performance decline. Distressed hotels in gateway cities and resorts across Europe and North America were on sale at up to 40% discount to 2019 values, which led to PE and institutional investors taking advantage of decreased pricing to acquire new assets.
Moreover, lenders and equity investors are now more cautious when investing in new real estate opportunities, both investment and development prospects, where they have implemented stricter underwriting standards leading to fewer approved projects.
However, there is a notable recovery in the real estate investment market post-pandemic in most sectors, including hotel, office, industrial, and logistics. In the hospitality sector, we should expect global real estate investments to return to pre-pandemic levels by next year.
The most important lessons of Korosh's personal property investment journey
One of the most important lessons I have learned through my real estate investment career is that you must assemble the right team for the transaction. An experienced investment, development, and asset management team can minimise a project’s risks and ensure that all the project targets will be met in the outlined timeline. Every team member should bring unique expertise to help the investors achieve their underwritten returns.
Having the right capital partners is also an important element that can determine the success of a project. The synergy between the GP and LPs must be under a spirit of cooperation, honesty, and integrity. The aim should be for a collaboration that extends to more than one project.
Hence, having all the elements in place in terms of the internal team and the capital partners is key. I have seen transactions failing and succeeding based on the quality and chemistry of the team. That’s why I would highly recommend being mindful of whoever you partner up with.
With all of this in mind and the market starting to slow, now is the best time to be investing in any real estate property as you’ll get more for your money and, soon enough, demand will start increasing once again. Investing now will give you a higher value-add on the equity of your property once the market picks up again.