Despite the virtual collapse of the real estate markets in 2008 and the huge losses that were suffered by just about everyone in the industry, real estate remains an established alternative asset class for both institutional and individual investors alike, even while pivotal issues for both investors and operating companies, such as risk tolerance, return expectations, governance, and transparency, continue to shift and evolve.
What’s even better news for the individual investor here at home is that the U.S. continues to lead the resurgence in global real estate investing. Despite our lackluster economic recovery and future uncertainty, our country remains the world’s favorite safe haven, especially given the current instability in Europe as well as the economic slowdown in China and other parts of Asia.
So what are some options for high-net-worth investors looking to leverage their investments in commercial real estate? Private equity funds and real estate investment trusts (REITs) are both excellent investment platforms with demonstrably proven track records and exceptional value.
Though real estate closed end funds are not generally available to the public, they are accessible to high-net-worth investors through investment advisors and placement agents. These funds are usually partnerships or limited liability corporations which establish investors as limited partners (LPs) with the general partners (GPs) managing the pooled investors’ capital.
“Private equity funds and real estate investment trusts (REITs) are both excellent investment platforms with demonstrably proven track records and exceptional value.”
Finding the right fund or REIT, however, requires extensive, careful analysis, both of the type of fund and specific sector you might be interested in, as well as your personal investor profile. Meaning, before you make any significant investment decision, it’s important to thoroughly review your financial situation, investment objectives, risk tolerance, time horizon, and diversification and liquidity needs with your financial advisor. Read the prospective fund’s private placement memorandum or offering documents, and pay special attention to the GP’s track record. Smaller or emerging funds will inevitably offer higher yields since they also present higher risk, but it may be prudent to initially concentrate on those funds whose managers have proven skill sets and a history of successfully managing funds.
Another critical investment consideration is a private real estate fund’s primary investment strategy, which generally falls into one of the following three categories:
Core funds are generally considered to be the most conservative investment strategy, characterized by lower risk and lower return potential. These funds primarily invest in top-tier, grade-A properties in major urban markets such as New York City, Boston, Los Angeles, San Francisco, and Washington, DC.
This is a moderate-risk, medium-return strategy where managers typically buy properties, make some strategic improvements, and sell at an opportune time for gain. Value-added improvements can range from solving managerial or operational problems, to physical improvements, to solving or restructuring capital constraints.
Usually considered the most aggressive strategy, this approach involves high-risk investments with high-return potential. The properties often require a significant degree of enhancement or repositioning and generally include investments in development, raw land, and niche property sectors. According to GlobeStreet’s John Salustri, even the currently recovering housing market is fertile ground for savvy opportunistic fund managers. A number of funds have been acquiring blocs of foreclosed homes and bank-owned real estate as fast as they can in order to rehabilitate them for quick resale or put them up for rent in our currently burgeoning renters’ market.
The above categories of investment strategies cover the gamut of property types across all major real estate sectors including apartments, industrial, retail, office and hospitality, and vary widely in deal size and geographic region.
“REITs invest directly in properties and are required to pay out at least 90% of their taxable income as dividends to their shareholders.”
REITs have performed phenomenally well over the last several years, in most cases outperforming both the stock markets and private equity funds. REITs trade on public exchanges just like stocks and are, therefore, far easier to get in and out of than private equity funds. REITs invest directly in properties and are required to pay out at least 90% of their taxable income as dividends to their shareholders. There are REITs for virtually every sector of the real estate industry including storage, healthcare, and even cell towers. Apartment sector REITs, for instance, which have soared as homeownership has consistently dwindled since the onset of the financial crisis, might be somewhat overvalued, although fundamentals for multifamily properties will very likely remain strong throughout this year.
Once your careful “due diligence” process is completed and you’ve thoroughly analyzed your risk tolerance and investment goals and selected the strategy that best matches your return expectations, there are any number of private equity funds and REITs that offer a wealth of metrics available to accurately gauge a fund or a REIT’s track record.
At CohnReznick, our professionals help our clients with comprehensive financial solutions at all levels of the capital stack in order to maximize opportunities in today’s dynamic real estate market. Our institutional clientele include private equity funds, pension funds investing in real estate, REITs, commercial and residential property owners and operators, hotels and resorts, real estate developers, homebuilders, and land developers. As true business advisors, we understand the risks they face and help them meet their challenges by offering a comprehensive array of services ranging from audit and assurance and tax compliance to litigation consulting, distressed asset management, transaction structuring, valuations, and appraisals.