Investing in Real Estate Funds With the “Big Dogs”

As 2014 draws to a close, there are some telling statistics that show a voracious appetite for private real estate investments.

Globally, there is a wave of capital that is continuing to flow into private real estate investment funds. Private real estate assets under management reached an all-time high in June at $742 billion. The amount of uncalled capital available for investment, or “dry powder” to use an industry term, is also at an all-time high of $221 billion, according to global research firm Preqin. Players such as Blackstone, Lone Star and Pimco all closed major funds in 2014. In fact, Blackstone and Lone Star both closed $7.2 billion funds.

A variety of factors are fueling a resurgence in investor demand for real estate. Certainly, the recovery in industrial and multifamily real estate markets is at the top of that list. Many commercial real estate markets are seeing improving values with fundamentals such as occupancies and rents once again rising. Real estate also provides an attractive yield compared to other vehicles, such as corporate bonds, in this exceptionally low interest rate environment. In addition, some investors are simply looking to diversify investment portfolios.

The improving fundamentals has translated into solid performance for many private equity real estate funds. Some funds are posting hefty profits. For example, Fortress Investment Group made $200 million on its $175 million investment in San Francisco’s Parkmerced residential housing complex, according to a recent Wall Street Journal article. In addition, the average real estate fund returns for the three years ending in March 2014 were 14.4 percent?—?edging out returns in buyout returns at 14.3 percent and venture capital funds at 12.7 percent, according to Preqin,

Big investors are stepping up direct real estate buying. For example, Global life insurance giant Allianz announced in mid-December that it would co-invest up to $1 billion in U.S. real estate with Manulife Asset Management Private Markets. The partners plan to seek out investments in high quality office properties in gateway cities, such as New York and Chicago.

Individual accredited investors certainly can take note of those buying trends, and they too can find ample opportunities to invest directly in real estate properties through an online real estate crowdfunding platform. CrowdStreet, for example, provides direct investing in investment-grade commercial properties such as suburban office, apartments and seniors housing, and will soon post opportunities to invest in real estate funds in 2015.

Investors both large and small adopt real estate investment strategies that fit their “risk profile” or comfort level. In real estate,that means selecting from core, core-plus, value-added and opportunistic investment strategies that are generally defined as follows:

  • Core: The least risky. Generally, core strategies focus on stabilized properties that are well occupied and in great locations. Correspondingly, core strategies offer the lowest targeted returns.
  • Core-plus: A moderate risk strategy. Properties are still often stabilized but in slightly less desirable locations (in comparison to core assets) and are slightly older. Investors should expect a premium in targeted returns over core strategies.
  • Value-added: Moderate to high risk. Value-added assets offer additional upside through leasing vacancies and capital improvements aimed at enhancing immediate asset value. Investors should expect a premium in targeted returns over core-plus strategies.
  • Opportunistic: These are the highest risk and usually offer the highest targeted returns. Opportunistic strategies may involve scenarios such as an empty building, redevelopment or distress that, if cured, will dramatically increase asset value.

Another notable trend that individual investors should note is that the proportion of institutional investors targeting opportunistic private real estate funds is up 40 percent compared to a year ago, according to Preqin. That kind of spike suggests that investors are not only seeking out real estate buying opportunities, but they view current market conditions as conducive to taking on additional risk and pursuing investment opportunities that can deliver the highest returns.

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