Private equity real estate
Encyclopedia
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.
Core Plus: This is a moderate risk/moderate return strategy. The fund will generally invest in core properties however some 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 will involve buying a property, improving it in some way, and selling it at an opportune time for a 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, and niche property sectors. Investments are tactical.
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.
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.
Investment
Investment has different meanings in finance and economics. Finance investment is putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security for the principal amount, as well as security of return, within an expected period of time...
finance
Finance
"Finance" is often defined simply as the management of money or “funds” management Modern finance, however, is a family of business activity that includes the origination, marketing, and management of cash and money surrogates through a variety of capital accounts, instruments, and markets created...
, 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
Collective investment scheme
A collective investment scheme is a way of investing money alongside other investors in order to benefit from the inherent advantages of working as part of a group...
, 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.Strategies
Private equity real estate funds generally follow core-plus, value added, or opportunistic strategies when making investments.Core Plus: This is a moderate risk/moderate return strategy. The fund will generally invest in core properties however some 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 will involve buying a property, improving it in some way, and selling it at an opportune time for a 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, 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 (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
Private equity fund
A private equity fund is a collective investment scheme used for making investments in various equity securities according to one of the investment strategies associated with private equity....
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.
See also
- Real estateReal estateIn general use, esp. North American, 'real estate' is taken to mean "Property consisting of land and the buildings on it, along with its natural resources such as crops, minerals, or water; immovable property of this nature; an interest vested in this; an item of real property; buildings or...
- Real estate transactionReal estate transactionA real estate transaction is the process whereby rights in a unit of property is transferred between two or more parties, e.g. in case of conveyance one party being the seller and the other being the buyer...
- Private equityPrivate equityPrivate equity, in finance, is an asset class consisting of equity securities in operating companies that are not publicly traded on a stock exchange....
- Taxation of Private Equity and Hedge FundsTaxation of private equity and hedge fundsPrivate equity funds and hedge funds are private investment vehicles used to pool investment capital, usually for a small group of large institutional or wealthy individual investors. They are subject to favorable regulatory treatment in most jurisdictions from which they are managed, which allows...