In my experience, a good property investor spends almost all of their time analysing the merits of the individual asset: the size and aspect of the land, the quality of the improvements, the layout of the floor plates, the quality of the tenants etc. By contrast, the expert investor dedicates at least as much time to analysing the network (both present and future) as they do to analysing the merits of the individual asset.
At EG, about half of our due diligence on real estate investments is spent mapping out the “network”, which means we spend time researching the following key questions:
- does the individual asset form part of a functioning cluster of similar assets ?
- if it forms part of a functioning cluster, who owns the neighbouring properties? what are their plans and ambitions for these properties ? (remember: we are hoping for smart, enterprising neighbours who have viable commercial ambitions for their properties)
- if it doesn’t form part of a functioning cluster, then is the asset a good candidate for land use change? how does the asset’s zoning relate to neighbouring zones and how might rezoning assist in creating value?
- what infrastructure assets exist in close proximity to the asset? will this infrastructure be upgraded and when? what implications does any such upgrade have for the asset’s tenants and the asset’s highest and best use?
- what is the quantum and profile of total public and private investment that is likely to occur within a 1km radius of the asset over the term of your investment period (typically, 5-10 years).
At EG we call this the Network Investment Model, or more colloquially, the “piggy back” model. In other words, when EG invests in an asset, we are looking to benefit from a “free ride” from the network.
So while EG only invests in assets where we can add value through active asset management, we do not invest in assets where the sole source of value-add derives from our own strategy. We are looking to leverage the collective power of the cluster rather than just our own smarts.
Swimming is far more rewarding when you develop a habit of catching waves. And the waves in real estate investment are generated by the network. Study and map the network and you will achieve consistent long term out performance.