Intro to Private Equity Real Estate

Posted by | April 6, 2013 | Research | No Comments

Private equity real estate is one of the oldest asset classes that investors can access. There are two primary return components in real estate, cash flow and appreciation. Many managers involved with private equity real estate will employ leverage to enhance portfolio performance; this does have a downside when markets are not favorable or when the consumer economy is stressed.

Private equity real estate is not for everyone. Investors who need liquidity should begin with publicly traded instruments like REITs and CMBS. The advantages of public ownership are generally sourced from transparency and liquidity. Some of the cons of investing with REITs include being subject to the daily market fluctuations in the stock market; meaning the security price of the public REIT may not always reflect the underlying value its real estate assets. Investors in private equity real estate must have a long investment horizon, as lock up periods and return actualizations may take years. Investing in this asset class involves the ownership of real property assets, either on a direct basis or through a commingled investment vehicle. In addition, another feature of investing in the private markets is transaction data.

The value of private equity real estate is determined by periodic appraisals that consider the property’s net operating income and the physical condition of the asset, as well as a comparison (both quantitative and qualitative) to similar properties in the market.

Benefits

  • Diversification
  • Cash Flow
  • Inflation Hedge
  • Avoid Stock Market Risk (Non-Public REITS)
  • Direct Ownership
  • Expand efficient frontier

Risks

  • Liquidity
  • Volatile Returns
  • Transparency
  • Greater Idiosyncratic Risk
  • Legal/Political/Operational (due to direct investment)