The Importance of Allocating Capital Wisely
But obtaining capital is one thing. Using it effectively is quite another. A blue-chip REIT won't squander that capital by making investments at returns less than its true cost. Rather, it will create value for its shareholders by investing it effectively, in property acquisitions, new developments, or in other ways. And it is the spread between the investment return and the cost of capital, adjusted for risk, that's most important for investors, not just the absolute levels of capital costs or investment returns.
Some REIT investors use the term franchise value to refer to the ability of a REIT to generate returns on new opportunities that exceed its cost of capital. There are times, such as in the ...
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