Affluent investors are expressing a growing interest in private real estate funds as they regain their appetite for risk, according to a recent report from Prequin, an analytics firm specializing in the alternative investment sector.
More than half of investors in private real estate funds indicate they will increase their investment in 2013, compared to 36 percent last year, according to Prequin. The share falls to 45 percent among investors with less than $10 billion in assets under management.
“There are strong signs that investor confidence in private real estate funds is returning,” Andrew Moylan, manager of real estate data, said in a statement. “While a large proportion of investors focused primarily on core investments following the financial downturn in 2008, many are now increasingly looking at opportunities higher up the risk/return spectrum.”
Private real estate funds are typically available to only high net worth “accredited” investors and institutional investors and are usually organized as limited partnerships, according to Wells Fargo Advisors. The funds can invest in property, real estate investment trusts, debt instruments and derivatives. They make money when the underlying investments gain value and are sold. Fund investors typically receive a share of the proceeds.
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Private real estate funds are typically structured to last for seven to 10 years, including an investment period of up to three years. Once the funding period ends, the funds are typically closed to new investors. Minimum funding commitments are typically large, according to Wells Fargo.
The funds tend to use one of three strategies. Considered the most conservative, the core-plus strategy typically invests in high quality properties, according to Wells Fargo. Value-added, a moderate-risk strategy, usually involves fund managers improving the properties in some way then selling at a profit. Opportunistic strategies focus on development, raw land or niche property sectors and are considered the most high-risk.
Alternative investments offer the ultra wealthy investors higher returns – at a higher risk.
Private real estate funds are not suitable to all investors, according to Wells Fargo. They are relatively illiquid, long-term investments, and their portfolio holdings can be difficult to value. The funds may also use leverage to enhance returns, while increasing risk. Private real estate funds are less transparent than publicly traded products, and fund managers typically have total investment authority.
“You are often putting your complete trust in the managers’ abilities to meet their funds’ objectives, without the benefit of knowing their investment selections,” Wells Fargo warns of the alternative real estate investment product.