Private equity real estate
In investment finance, Private Equity Real Estate is an asset class consisting of equity and debt investments in property. Investments typically involve an active management strategy ranging from moderate reposition or releasing of properties to development or extensive redevelopment.
Investments are typically made via private equity real estate fund, a collective investment scheme, which pools capital from investors. These funds typically have ten year life span consisting of a 2-3 year investment period during which properties are acquired and a holding period during which active asset management will be carried out and the properties will be sold.
History and evolution
There is a long history of institutional investment in real estate both through direct ownership of property and through pooled investment funds. Initially institutional real estate investments were in core real estate, however, market conditions in the early 1990s led to the emergence of opportunistic funds which aimed to take advantage of falling property prices to acquire assets at significant discounts. Private equity real estate emerged as an independent asset class in the beginning of the 21st century and has experienced huge growth in recent years.
Private equity real estate funds generally follow core, core-plus, value added, or opportunistic strategies when making investments.
Core: This is an unleveraged, low-risk/low-potential return strategy with predictable cash flows. The fund will generally invest in stable, fully leased, multi-tenant properties within strong, diversified metropolitan areas.
Core Plus: This is a moderate-risk/moderate-return strategy. The fund will generally invest in core properties; however, many of these properties will require some form of enhancement or value-added element.
Value Added: This is a medium-to-high-risk/medium-to-high-return strategy. It involves buying a property, improving it in some way, and selling it at an opportune time for gain. Properties are considered value added when they exhibit management or operational problems, require physical improvement, and/or suffer from capital constraints.
Opportunistic: This is a high-risk/high-return strategy. The properties will require a high degree of enhancement. This strategy may also involve investments in development, raw land, mortgage notes, and niche property sectors. Investments are tactical.
Considerations for investing in private equity real estate funds relative to other forms of investment include:
- Substantial entry costs, with most funds requiring significant initial investment (usually upwards of $1,000,000) plus further investment for the first few years of the fund.
- Investments in limited partnership interests (which is the dominant legal form of private equity real estate funds) are referred to as "illiquid" investments which should earn a premium over traditional securities, such as stocks and bonds. Once invested, it is very difficult to gain access to your money as it is locked-up in long-term investments which can last for as long as twelve years. Distributions are made only as investments are converted to cash; limited partners typically have no right to demand that sales be made.
- If a private equity real estate firm can't find suitable investment opportunities, it will not draw on an investor's commitment. Given the risks associated with private equity real estate investments, an investor can lose all of its investment if the fund performs badly.
For the above mentioned reasons, private equity fund investment is for those who can afford to have their capital locked in for long periods of time and who are able to risk losing significant amounts of money. This is balanced by the potential benefits of annual returns, which are often excess of 20% for successful opportunistic funds. Investors in private equity real estate funds tend, therefore, to be institutional investors or high net worth individuals.
Size of Industry
The popularity of private equity real estate funds has grown since 2000 as an increasing number of investors commit more capital to the asset class.
Private Equity Real Estate is a global asset class and in 2007, 46% of capital raised was focused on the US, 26% was focused on Europe and 27% was targeting Asia and the rest of the world.ñ
- Real estate
- Real estate transaction
- Private equity
- Taxation of Private Equity and Hedge Funds
- Real estate investment trust
- Australian real estate investment trust
- McDonald & Stiver, Institutional Real Estate - Investment Style Categories, 2004