Private Equity Real Estate: Definition, Types and Returns

What is Real Estate Private Equity?

Private equity has become a buzzword in the world of finance, but not many people know about its real estate component – real estate private equity. In the simplest terms, real estate private equity is a type of investment fund that raises capital from high net worth individuals and institutional investors to purchase, develop, and manage real estate properties. In this blog post, we will dive deeper into what real estate private equity is, its various types, and the returns that investors can expect.

Real estate private equity versus public equity

To start with, real estate private equity is different from public equity in the sense that it focuses on private real estate properties rather than public stocks. Unlike public real estate investments, private equity investments are not traded on a public stock exchange and are illiquid, meaning they cannot be easily sold or redeemed. This creates a unique set of risks and opportunities for investors.

Types of real estate private equity

There are different types of real estate private equity funds based on their investment strategies. For example, core funds invest in stable assets that generate regular cash flows, while value-add funds invest in properties with potential for value creation through renovation, repositioning, or lease-up. Opportunistic funds, on the other hand, focus on distressed properties or markets with high growth potential.

Returns

As for the returns, real estate private equity funds typically target higher returns than traditional real estate investments due to the higher risk and illiquidity. The returns can be divided into income returns and appreciation returns. Income returns come from the rental income generated by the properties and are distributed to investors as dividends. Appreciation returns come from the increase in property value over time and are realized when the property is sold.

According to a report by the National Council of Real Estate Investment Fiduciaries (NCREIF), the average annual return for private real estate equity funds from 2000 to 2019 was 9.62%, with income returns accounting for 5.4% and appreciation returns accounting for 4.2%. However, the returns can vary widely depending on factors such as the investment strategy, property type, market conditions, and management skill.

Conclusion

Real estate private equity can be a lucrative investment option for those who are willing to take on higher risk and illiquidity in exchange for potentially higher returns. However, it is important to do due diligence and understand the investment strategy, track record, and fees of the fund before investing. Moreover, real estate private equity should not be the sole focus of an investment portfolio, but rather a part of a diversified portfolio that includes other asset classes such as stocks, bonds, and real estate investment trusts (REITs).