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 a 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.

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:

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.

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