Create a Successful Capital Investment Strategy

How to Create a Successful CRE Capital Investment Strategy

Effective capital investment remains a critical element for any real estate organization given upgrades to building equipment and infrastructure over time. Finite funds for deployment, internal and external performance objectives and managing operational risk are all compounding pressures for proper capital investment. Moreover, capital investment is increasingly less about financial performance and the property lifecycle alone: energy use, sustainability and portfolio-wide goals are also emerging considerations.

Given the complexity of today’s capital investment programs, what strategies should leading real estate managers take to ensure success? We list three considerations below:

Set Clear Objectives Beyond Financial Outcomes

Often, capital investment strategies are focused on the financial outcomes of the program itself, with less emphasis on original needs and objectives. What are the larger organizational goals of the capital strategy? What are the end results of the strategy and how does it look from an operational perspective? Is there more than one path to achieve the objective, aside from the process already in place? How does the capital investment align with existing operational planning?

Also critical is the assessment/evaluation process of the capital investment: what teams or individuals are involved in the assessment or monitoring of the program? Should it be property management? Finance teams? Asset management? What performance indicators, both qualitative and quantitative, should be used in the assessment of the capital program?

Look for More Ways to Measure Volatility and Risk

When assessing the financial success of a capital investment, you also need to consider increasingly complex risk management analyses. Traditional capital planning mainly involves developing a base cost-benefit analysis of the investment, followed by scenario and stress-testing to calculate different financial outcomes. However, because this type of analysis is limited by the accuracy of the assumptions in the analysis, it may drastically underestimate risks or negative outcomes of the investment.

As such, more organizations are using advanced probability testing such as Monte Carlo analysis to highlight a wider range of scenario results. While this usually involves complex analysis, management programs are available to help firms develop and optimize capital investment strategies based on their individual corporate needs.

Use Software as the Base for Capital Investment

Above all else, capital investment strategies stand to benefit from the adoption of management software that can help track, monitor and optimize capital investment strategies. Moving away from static Excel spreadsheets can help organizations fully understand the impacts and risks associated with a capital investment program over time.

Factors such as rental income, equipment costs, usage, depreciation and investment timing become dynamic inputs, versus static assumptions that require manual changes to gauge a wide range of possible financial outcomes. Multiply static capital analysis efforts over multiple buildings and multiple portfolios and one can see the efficiencies gained by using analytics to drive better capital investment strategies for an organization.