What Is Private Equity Real Estate?

Private equity real estate is an asset class composed 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.

Key Takeaways

  • Private equity real estate is an asset class of pooled private and public property investments.
  • Private equity real estate funds became a popular way to acquire properties as values fell in the mid-1990s.
  • Private equity real estate investing requires significant upfront capital.
  • This type of investment is risky but can realize returns of 8-10% are not uncommon.

Understanding Private Equity Real Estate

Investing in private equity real estate requires an investor with a long-term outlook and a significant upfront capital commitment (over $250,000 initially and follow-on investments over time). Little flexibility and liquidity are 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. In addition, distributions can be slow because they are 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 require a capital commitment. That capital is then drawn down as suitable investments are made. If no investments are made during the investment period specified by the agreement, nothing can be drawn from the commitment. 

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 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, separate insurer accounts, or other legal structures.