Brokers are doing their job well. In an environment where deals fall through off rising rates, which I assume means they were too sensitive to debt anyway, properties are trading at cap rates where even with aggressive leverage, they will likely deliver sub 15% IRRs, and sub 8% coc returns after fees, if you're following a traditional PE model.
The only way I realistically see these metrics being surpassed is if rent growth rises yoy, with little investment into a property, so basically buying a product and expecting it to rise in value without changing it. Which is fine, but I fail to see how so many 'PE' groups continue to place capital.
The idea behind a PE investment is that the group's expertise will be used to create an asset that will be able to deliver returns superior to those of traditional public equity and alternative markets.
Question for brokers working with institutional clients or family offices; what is the rationale of clients making investments into sub 4 cap properties? Are all of these going to local guys looking to preserve family wealth, or some other strategy that does not look for short-term returns? I'm trying to better understand competition and their perspective.
Question for young guys working in PE; how are your bosses selling sub 4 or 5 cap properties to LP's or large investors in your fund if the retail-price tag on most assets in most classes has close to negative leverage without major overhauls, which implicitly bring on more risk, and will deliver sub 20% IRRs?
Taking a broker's underwriting package might get there, but almost without fail, every broker underwriting i've seen misses details material to returns/the deal, or assumes rent growth with little investment in a market with no wage or job growth.
Am i thinking about this too much, or am i missing something? Would love to hear some thoughts.