Is Value-Added and Opportunistic Real Estate Investing Beneficial?: If So, Why?

There has been a great deal of interest in whether value-added and opportunistic real estate investing has resulted in appropriate risk-adjusted returns. In this paper, data from the National Council of Real Estate Investment Fiduciaries (NCREIF) property database are examined to bring new evidence to bear on the subject. Using these data, ex post returns are calculated for all sold properties. Then groups are formed based on these returns. A series of discriminant functions are then estimated to relate membership in these groups over time to value-added and opportunistic indicator variables (i.e., risk exposures) and market conditions. Results demonstrate that while value-added and opportunistic private equity real estate investments have higher returns than core investments, their superior returns are driven primarily by market conditions and the use of cheap debt rather than by risk exposure.