Alternatives Unlocked: Private Real Estate

Unlocking Private Real Estate

WHAT IS PRIVATE REAL ESTATE?

Commercial Real Estate

Commercial real estate refers to the many different kinds of properties that are used for business or investment purposes with the goal of generating capital appreciation, income, or both. Private commercial real estate investments are typically negotiated directly and do not trade in public markets.

Commercial Real Estate Sectors

Different types of commerical real estate include:

 
 

Commercial Real Estate Classifications

Class A

Highest quality real estate properties in prime locations; often new construction or recently renovated
Class B

Middle-quality, generally older, functional and usable space that may require some upgrades or renovations
Class C

Lowest quality, old or outdated property that may not be operated or maintained well

 

Private Real Estate Equity and Credit

There are two main categories of real estate investments 
 

Commercial Real Estate Capital Stack

The real estate capital stack helps illustrate how both real estate equity and credit factor into the total value of a property.

 

Real Estate Equity and Credit in Different Market Environments



Fluctuating property values affect equity and debtholders differently. Debtholders typically have more certainty and downside protection than equity owners.  

In the example on the right, we show that the initial equity is $40, the debt is $60 and the gross property value is $100. In the middle bar example, we see the gross property value increase by 20%, causing the equity value to go from $40 to $60, but the debt principal is unchanged at $60. On the right bar example, we see the gross property value decrease in value by 20%, causing the equity value to go from the initial $40 to $20, but once again the debt principal is unchanged at $60. 

Fluctuating property values affect equity and debtholders differently
For illustrative purposes only. Structural seniority is no guarantee against future losses or the receipt of interest and/or principal payments.
Fluctuating property values affect equity and debtholders differently
For illustrative purposes only. Structural seniority is no guarantee against future losses or the receipt of interest and/or principal payments.
 
 

ATTRIBUTES OF REAL ESTATE INVESTMENTS

Private Real Estate Investments Typically Seek to Deliver... 

 

CONSIDERATIONS FOR REAL ESTATE INVESTING

Evaluating Commercial Real Estate Investments

There are several factors to consider when investing in commercial real estate equity and credit. ​

1
INVESTMENT PURPOSE AND TIME HORIZON
2
EXPECTED CASH FLOWS AND PROFIT OPPORTUNITIES
3
NEW CONSTRUCTION VS. EXISTING PROPERTY 
4
PROPERTY VALUATION
5
LEVERAGE
6
OVERALL REAL ESTATE MARKET
7
PROPERTY LOCATION
8
TENANT QUALITY
 

Commercial Real Estate Risk Investment Categories​

All of the factors above play a part in determining the risk and return profile of a commercial real estate investment. The common risk classifications below provide a framework for understanding risk and return expectations across different types of real estate investments. ​

Types of Commercial Real Estate Investment Vehicles

There are four primary ways to invest in commercial real estate today
 

Characteristics of Real Estate Investment Trusts (REITs)

REITs typically offer the following characteristics, although the benefits and risks of each REIT investment are unique and should be evaluated independently.    

Benefits of REITs
Diversification PotentialProfessional ManagementRegular Income PotentialGrowth PotentialPotential Tax Advantages

Diversification across property types, geographic locations, and tenants

Potentially different risk/return characteristics than stocks and bonds

Professional management by experienced, well-resourced experts

 

Legal requirement to distribute 90% of income through dividends can provide investors with a steady income stream

Portfolio appreciation can benefit investment value and drive dividend growth while rent growth may support dividend growth

Favorable tax treatment of REIT dividends

Return of Capital (ROC) may enhance tax-efficiency of REIT dividend income

 

Publicly Traded REITs vs. Private REITs

 
 Publicly Traded REITs
Private REITs
AccessInvestors buy and sell shares on public exchangesInvestors invest directly with the manager or through an intermediary; not traded on an exchange
InvestmentsPortfolios of real estate properties or loans that may be diversified by property type and/or geographyPortfolios of real estate properties or loans that may be diversified by property type and/or geography
LiquidityExchange-traded: Investors buy and sell shares, enabling them to access their money more quickly if neededIlliquid or semi-liquid: A level of periodic liquidity is typically provided subject to certain thresholds and requirements
Pricing depends on public market sentimentInvestors buy and sell at a share price that may be different than the underlying value of the REIT’s portfolioInvestors subscribe and redeem at net asset value
Explore Continuing Education On-Demand
For Financial Professionals Only

Continuing Education: Introduction to Private Real Estate


An on demand webcast offering one hour of continuing education (CE) credits.

Explore Other Private Market Asset Classes
Dig deeper into three other private market asset classes to learn what they are, why they matter, and how they may fit within existing portfolios.
  • Private Equity
    Private equity involves investment in private companies with growth potential or private businesses that need financial restructuring with the intention of enhancing the value of the invested companies over time.
    Learn More
  • Private Infrastructure
    Private Infrastructure entails the raising of private capital to fund the development of infrastructure, including the physical structures, facilities and systems, required for economies and societies to function.
    Learn More
  • Private Credit
    Private credit consists of investment in privately negotiated loans issued from non-bank lenders to middle market companies that are typically not publicly traded.
    Learn More