Greenfield Development, or sometimes simply referred to as a greenfield, could refer to expansion strategy or a specific project in which a REIT manager decides to develop a new property or development from the ground up. The name is derived from the supposedly green patch of grass that existed in the plot of land before it's being developed.
The alternative to Greenfield Developments as a growth strategy would be property acquisitions. This involves the buying over of already existing properties as a means of growing the REIT's portfolio. When the buying of an under performing or distressed property (in the effort to turn the property around) is involved, it has also been referred to in some investment literature as a Brownfield Development.
When a REIT decides to expand its property portfolio, it will usually adopt either one of these 2 strategies. Which is the more beneficial strategy for a REIT? That will depend largely on prevailing economic conditions including property valuation, government regulations, construction costs and interest rates. During times of high construction costs, acquisitions would generally be a safer bet over greenfield developments. However when recovery costs are relatively low in comparison to property valuations, it may make more sense to build from the ground up.
Cross border REITs taking advantage of low interest rates in the host country, while enjoying cheaper construction costs abroad, have been known to favour greenfield developments as an expansion strategy over property acquisitions.
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[…] opposite of a Brownfield Development strategy would be the Greenfield Development strategy where a developer starts a property project fresh from the ground up. This post is part […]
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