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. 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. Strategies
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 edium-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. Features
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 plus further investment for the first
few years of the fund. Investments in limited partnership
interests 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
Secondary Market Pre-existing investor commitments to
private equity real estate funds purchased trade in secondary market.
Private equity real estate funds sell for opportunistic, liquidity and other
reasons. Established buyers in the market include Partners Group, Landmark,
Strategic Partners, NorthStar Asset Management, and CBRE. Active secondary
brokers include Setter Capital Inc. SecondaryLink.com and nyppex.com are two
platforms focused on the secondary markets for trading of real estate funds
and other alternative fund investments. The real estate secondary market has
grown in recent years to an estimated $5.3bn in 2013
See also Real estate
Commercial real estate fund Real estate transaction
Private equity Taxation of Private Equity and Hedge
Funds Real estate investment trust
Australian real estate investment trust References
^ McDonald & Stiver, Institutional Real Estate - Investment Style Categories,
2004 ^ CANTWELL, BRIAN. "Real estate
secondaries hit $5.3bn in 2013". PEI. Retrieved 13 April 2014.