Value-added real estate strategies ‘discouraged’

As the US property market continues to deteriorate, research by fund manager RREEF reveals that value-added and opportunistic strategies should be treated with ‘caution’. However, desperate sellers will produce ‘attractive opportunities’ for some.

Value-added and opportunistic strategies should be handled with care by investors, according to research from global real estate fund manager RREEF.

Unveiling its 2009 outlook on the US property markets, RREEF said value-added investments should “generally be discouraged” adding that opportunistic real estate should be “treated with caution in 2009”.

The real estate arm of Deutsche Bank said it had seen increased interest in core properties, with long-term investors attracted to high quality, stable properties in prime markets.

“The investment market in commercial real estate is quickly transitioning from its recent roll as a liquid, appreciative asset back to its historic role as an income producing investment that provides some inflation hedge,” the report, the 2009 US Real Estate Investment Outlook and Market Perspective, said.

A quarter of all delegates at the Pension Real Estate Association (PREA) spring conference in Washington DC this week said core strategies made the most sense for 2009 against 32 percent who opted for opportunistic strategies and 30 percent who warned no strategy was appropriate while they “waited for the dust to settle”.

However, despite urging caution over value-added and opportunistic strategies RREEF said there would be attractive deals for some high-risk investors.

“Given that a high percentage of ongoing development projects, including completed properties with large vacancies, will become distressed in the coming year as loans become due or lenders remargin, numerous opportunities for acquisitions will be available,” the report stated.

The report recommended targeting metropolitan areas, such as Washington DC, Baltimore, San Jose, New York, Fort Lauderdale, Miami, Los Angeles, San Diego, Denver and Orange County as possible destinations for investment.

The multifamily sector, RREEF said, was set for a “remarkably strong recovery” between 2011 and 2015, “possibly with the strongest effective rent gains in history”. The immediate outlook for the US office sector was, however, “poor” with the “gulf between new supply and demand continu[ing] to expand”. The sector wasn’t expected to hit bottom until late 2010, with vacancy rates expected to hit as much as 14 percent nationally by 2012.