It has recently been estimated that among high-net-worth individuals, approximately 33 percent of their portfolios are currently made up of real estate holdings. Among those, a large percentage is made up of private real estate equity, typically including properties that the individuals are involved in managing on a daily basis, even if they have hired a professional management company to do the dirty work.
However, there is still a high demand for hands-off real estate equity investments. Many investors with large amounts of capital looking to diversify into significant real estate holdings are having trouble because there has previously been no middle ground between outright private ownership and the completely passive investing experience offered by real estate investment trusts, also known as REITs.
Many people simply don’t have the time, skillset or the inclination to jump headlong into managing commercial properties, even if the majority of tasks can be effectively delegated. That has left those with significant investment capital who would like to diversify into real estate grappling with the many shortfalls of REITs, at least until now.
Private real estate equity firms are gaining in popularity, and these firms have some huge advantages over REITs. The types of properties that typically make up a private equity real estate portfolio are office buildings, industrial properties, retail shops and multifamily apartment buildings. There are also specialized investments such as elderly and college dormitory housing, hotels, self-storage units and medical buildings, to name a few.
One of the reasons that people are drawn to this type of investing is that private real estate equity companies don’t suffer from the immense pressures that REITs are under to produce dividends. This means that they are under no obligation to quickly acquire properties when they are cash-rich but property-poor. A private real estate equity firm can sit on a pile of cash for as long as it chooses to do so. And this means that the well-run variants of this company structure never have to make questionable purchases in overbought markets. It also means that they can hoard cash, optimally positioning themselves to pounce when genuine market opportunities arise.
Additionally, REITs have become notorious for consuming large amounts of the funds’ capital through fees and costs. This has caused a steep decline in the amount of money being invested in the REIT market. Private real estate equity firms, on the other hand, can often maintain high levels of both vertical and horizontal integration, keeping all management, maintenance and construction functions in-house. This can dramatically reduce the costs associated with middlemen and outsourcing.