What Is 'Private Equity Real Estate'

Private equity real estate is an asset class that consists of pooled private and public investments in the property markets. Such investing involves the acquisition, financing and ownership (either direct or indirect) of property or properties via a pooled vehicle. Private equity real estate funds became prominent in the 1990s amid falling property prices as a way to scoop up properties as values fell. Previously, most institutional real estate investing adhered to core assets.

Breaking Down 'Private Equity Real Estate'

Investing in private equity real estate generally requires an investor with a longer-term outlook and a significant upfront capital commitment (over $250,000 initially and follow-on investments over time). Little flexibility and liquidity is offered to investors since the capital commitment window typically requires several years. Lock-up periods for private equity real estate can sometimes last for more than a dozen or more years. And distributions can be slow, as they're often paid from cash flow rather than outright liquidation (investors have no right to demand a liquidation). However, given real estate’s popularity as an asset class, it can provide high potential levels of income with strong price appreciation. Annual returns in the 6-8% range for core strategies and 8-10% for core-plus strategies are not uncommon. Returns for value-added or opportunistic strategies can be considerably higher. That said, private equity real estate is risky enough that investors can lose their entire investment if a fund underperforms.

Funds created for individual investors generally require that the investment be funded at the time of the signing of the investment agreement, whereas funds created for institutional investors generally require a capital commitment. That capital is then drawn down as suitable investment are made. If no investments are made during the investment period specified by the agreement, that sum can't be drawn from. 

Common Private Equity Real Estate Investments

Office buildings (high-rise, urban, suburban and garden offices); industrial properties (warehouse, research and development, flexible office/industrial space); retail properties, shopping centers (neighborhood, community and power centers); and multifamily apartments (garden and high-rise), are the most common private equity real estate investments. There are also niche property investments, such as senior or student housing, hotels, self-storage, medical offices, single-family housing to own or rent, undeveloped land, manufacturing space, and more.

Who Invests in Private Equity Real Estate?

Institutions (pension funds and nonprofit funds), third parties, such as asset managers investing on the behalf of institutions, private accredited investors and high-net-worth individuals invest in private equity real estate.

Private equity real estate investments are commonly pooled and can be structured as limited partnerships, LLCs, S-corps, C-corps, collective investment trusts, private REITs, insurer separate accounts or other legal structures.

 

RELATED TERMS
  1. Property Derivative

    A property derivative is a financial product that derives value ...
  2. Commercial Real Estate

    Commercial real estate is property, typically leased out to tenants, ...
  3. Private Equity

    Private Equity is a non-publicly traded source of capital from ...
  4. Investment Real Estate

    Real estate that generates income or is otherwise intended for ...
  5. List Price

    The list price, in the real estate world, is the suggested gross ...
  6. Real Property

    Real property is a term commonly used in land law to denote any ...
Related Articles
  1. Investing

    Private Equity Real Estate Funds vs. REITs

    REITs and Private Equity Real Estate Funds are two different ways to invest in real estate.
  2. Investing

    Can Real Estate Stabilize Your Portfolio?

    History suggests that real estate can provide diversification and a hedge against inflation.
  3. Investing

    A Guide to Real Estate Investing

    Investing in real estate is a popular choice for good reasons, but it's more complicated than owning your typical stocks and bonds.
  4. Investing

    Real Estate Vs. Stocks: Which One's Right For You?

    There are ups and downs for both real estate and stock investments, so before diving in, know the differences between the two.
  5. Investing

    Invest In Real Estate With $1,000 (Or Less)

    Here are some options to get you started in real estate for a fraction of what it would cost to buy an actual property.
  6. Investing

    Key Reasons To Invest In Real Estate

    There has been a lot of negativity over the real estate sector since 2008. Here are the reasons why you should be investing in it.
  7. Investing

    Flipping houses: Is it better than the buy-and-hold strategy?

    Real estate investors can choose flipping or buying and holding a property. Find out the pros and cons of each, and which real estate investment strategy may best for you.
  8. Investing

    Is Now A Good Time To Invest In Real Estate?

    From carrying costs to investment risk, there's a lot to consider before you invest in real estate.
  9. Investing

    4 Key Factors That Drive the Real Estate Market

    Whether you are investing directly or indirectly in property, you need to know the factors that affect its value.
  10. Investing

    Simple Ways to Invest in Real Estate

    Owning property isn't always easy, but there are plenty of perks. Here are some ways to invest in real estate.
RELATED FAQS
  1. The Role of an Asset Manager in the Real Estate Market

    Find out what role asset managers play in the real estate markets. Learn how real estate portfolios are selected and why ... Read Answer >>
  2. Which asset classes are the most risky?

    Understand why equities and real estate are the two riskiest asset classes, though they also provide the greatest potential ... Read Answer >>
  3. What are the differences between investing in real estate and stocks?

    Invest in real estate by purchasing physical property or buildings, or invest in stocks by buying a claim to a company and ... Read Answer >>
  4. Why can real estate be a good addition to a traditional stock and bond portfolio?

    Discover why real estate can be a good addition to a traditional stock and bond portfolio. Real estate is affected by economic ... Read Answer >>
  5. How do real estate hedge funds work?

    Understand what a hedge fund is and how it differs from a mutual fund. Learn about the ways in which a hedge fund becomes ... Read Answer >>
Hot Definitions
  1. Capital Asset Pricing Model - CAPM

    Capital Asset Pricing Model (CAPM) is a model that describes the relationship between risk and expected return and that is ...
  2. Return On Equity - ROE

    The profitability returned in direct relation to shareholders' investments is called the return on equity.
  3. Working Capital

    Working capital, also known as net working capital is a measure of a company's liquidity and operational efficiency.
  4. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  5. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  6. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
Trading Center