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DES MOINES, IA-Increasingly, institutional investors on a quest for higher returns are climbing the risk spectrum in search of greater rewards than can likely be generated by core real estate. To that end, many are allocating more capital to value-add, opportunistic and offshore real estate strategies, according to “Expectations & Market Realities in Real Estate: 2007 – No Stone Unturned, the Global Search for Real Estate Alpha.” The fourth annual forecast was recently released by Principal Real Estate Investors, Real Estate Research Corp. and Torto Wheaton Research.

Andy Warren, of Principal Real Estate Investors, tells GlobeSt.com that as the economy slows, certain asset types will provide the best opportunity for value-add plays. On the asset side, development, and especially industrial projects, are key. Additionally, the best value-adds in the retail and office segment will be properties with a repositioning story, such as the enclosed mall that could be transformed into a lifestyle center.

“Another thing that we have to look at with the economy slowing down is that certain markets will be more active than others,” Warren says. Houston, for example, is likely to continue to experience strong growth, while Detroit most likely will see no growth. Warren adds that the sunbelt and coastal states should remain vibrant markets.

In another move away from US core assets, foreign investors increasingly have been selling US properties to target other areas around the globe, Warren says. In markets, such as Eastern Europe and Asia, the investors are sometimes seeing double the returns realized on core assets in the US. Their experience as foreign investors in the US has made them comfortable to park their capital in other countries where the returns are greater, Warren explains.

Partnering with local players has become a key strategy for investors taking greater risks by entering new global markets or executing value-add strategies. The lack of transparency often associated with non-core real estate puts local market knowledge at a premium and often finds investors searching for development partners. Since everyone is looking for that “local player,” the market to find partners is extremely competitive, Warren says.

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