Real estate investments criteria: key factors

A careful assessment of the real estate asset is the first fundamental step to ensure the success of an investment. Before committing significant resources to a project, it is essential to analyze several factors that can influence the profitability and sustainability of the project in the long term, and therefore, the return on investment. A thorough evaluation not only helps mitigate risks but also provides a clear understanding of the potential of the property.

At Yeldo, this analysis process is crucial and is based on specific criteria that guide the decisions of our Investment Committee: our due diligence is rigorous to ensure that we offer only the best to our investors. In fact, we end up approving, on average, less than 3% of all the deals we analyze.

Strategic location and market demand

Perhaps the most important criterion in evaluating a real estate investment is location. The position of the property can be related to market demand, which also varies depending on the type of asset, whether residential, commercial, or logistical.

Areas that are well-connected and equipped with adequate services and infrastructure — naturally — are capable of attracting a larger number of potential buyers or tenants, making the investment safer and more profitable.

But that's not all: if the property is located in a tourist area, for example, it will have greater appeal compared to a more remote area, all other factors being equal. Similarly, the redevelopment of disused areas, which involves "restoration" work that boosts the territory by generating jobs and increasing the value of entire neighborhoods or towns, offers a greater added value.

As for the type of property, some asset classes are currently outperforming others. Luxury real estate, for example, continues to show strong demand in many metropolitan areas, while the logistics sector is rapidly gaining ground, driven by the rise of e-commerce. Additionally, sustainable construction is becoming increasingly popular, responding to a market in evolution and a growing focus on environmental sustainability. We've covered this in detail in this previous focus.

However, location is not the only aspect to consider; it's also crucial to evaluate the administrative process required for the project’s development. Obtaining permits can present complexities that affect project timelines and economic feasibility. For instance, in the Varedo Logistica project, the need to convert a plot of land from industrial to commercial use and to remediate chemical residues extended the waiting period. In similar cases, Yeldo tends to consider the operation complete once the conversion is achieved, without waiting for the construction to finish, in order to keep more focused objectives and shorter time horizons.

Business plan and economic considerations

The second key parameter concerns the business plan and economics of the project: it is essential that the presented business plan is solid and well-structured, with clear evidence of a significant net margin for the operation.

Accurate cost assessments are crucial to prevent unexpected issues during project development. An effective financial plan should include detailed financial projections, specifying sources of revenue and expected operating expenses. Additionally, it is vital to consider the return on investment and the payback period, both of which play a crucial role in the decision to proceed with the investment.

The clarity and realism of the projections not only help to assess profitability but also increase investors' confidence in the project. On the contrary, a weak or unclear business plan can jeopardize investor interest and, consequently, the project's viability.

The importance of sponsor reputation

A final relevant factor to consider is the reputation of the sponsor, which can be the construction company or the general contractor. The sponsor's solidity and reliability are key factors in evaluating a real estate investment.

Having a sponsor with a proven track record in similar projects — for example, a developer specializing in green buildings for a sustainable redevelopment project, whose technical expertise and knowledge are well established — offers greater assurance that the investment will be managed professionally and competently.

Confidence in the project team and their ability to execute is essential to reduce the risks associated with the investment: in a context where real estate projects can face unforeseen challenges, a sponsor with a flawless reputation is a valuable asset that can positively influence the outcome of the entire project.

Each project is different and must be carefully evaluated-our team of analysts can capture positive and critical aspects of each deal.

DISCOVER MORE ABOUT OUR DUE DILIGENCE PROCESS