Distress Signal

Li Zhang/Unsplash

The most significant fallout of the pandemic in the commercial real estate segment is that properties can’t meet their debt commitments due to lagging, or no rents. 

While this is hurting the property owners, it's also presenting a tantalizing opportunity for fearless investors willing to venture into today's messed up landscape.

How Does That Work?

For example, distress real estate investment fund ABC makes an INR 300 crore investment to help a new office tower in Bangalore, where the pandemic has bottomed out the office space market. 

Only half of the 200 office units have been sold, so ABC’s money gives the project some breathing room until the markets have improved. 

This is when ABC can sell the units back to interested parties at market price, turning a large profit. 

Context, Please.

Lately, a lot of money is flowing into real estate, a sector with uncharted post-pandemic prospects. Like Barry Sternlicht’s Starwood Capital, which has raised a new distressed fund with $10 billion of cash, which will enable it to buy office and hotel properties at lower-than-market rates. 

While some segments, like warehousing, are stronger than ever, distressed price tags are most likely to appear from properties that have been dislocated as a result of the pandemic, like office buildings and hotels in larger cities. 

Are Good Returns Assured?

Distress funds require a high risk appetite and a deep understanding of local markets. With office space demand uncertain, and hotel rooms lying vacant as business travel is on life support, a wrong investment decision could become an expensive one. 

The key to success is staying away from buildings destined to remain empty, a call only the most undaunted can make today.