Real estate represents one of the largest physical capital investment categories in a firm factor of production. It represents a substantial investment that corporations must make to competitively produce the goods and services required by their customers(Ambrose, Diop, and Yoshida 2017). But real estate can be even more attractive when firms strategically invest in it during its developmental stages.
Firms may want to strategically invest in real estate by owning them and acquiring them through a ground-up development or the re-innovation of existing properties for long term use. By doing so, the firm’s real estate investment takes a special and irreplaceable role in the firm’s asset book. This is because then a firm approaches investing in real estate in this manner, it increases the firm’s chances of changing its financial and operating leverage in the market, and as a result, it increases the proportion and type of growth options a firm has available in the long run. However, there is a significant risk that comes with this method of acquiring real estate.
Although, strategically investing in real estate during its developmental stages means a firm stand the chance of changing the financial and operating leverage it has in the market and increases the proportion and type of growth options a firm has available in the long run. It may, however, also decrease the firm’s ability to capture positive economic shocks in the future. Take, for instance, in the event of an economic shock, a firm that had invested in real estate during its production stages may experience a significant decline in the number of product sales. For example, a sudden rise in housing prices may mean consumers will no longer be able to pay off their living or office space. In this instance, firms that had strategically invested in real estate during its build-up phase will leave these consumers with fixed options to purchase real estate. These otherwise potential buyers/consumers will be forced to give up the property and look somewhere else, for the simple reason, which is they can no longer afford to acquire that property.
Therefore, strategically investing in real estate during the development stages has great risk attached to it. A better approach would then be to perform a more flexible strategy, in which, instead of investing and owning real estate, rather you lease the real estate to the buyer. By doing so, during times of a positive economic shock, houses and office spaces can be quickly reconfigured to meet a variety of firms and buyers space needs.
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