Introduction to Private Equity, Debt and Real Assets by Cyril Demaria

Author:Cyril Demaria [Demaria, Cyril]
Language: eng
Format: epub
ISBN: 9781119537373
Publisher: Wiley
Published: 2020-05-01T00:00:00+00:00

4.3.1 Private Real Estate, Infrastructure and Exotic Assets

Private real estate (PRE) funds represent roughly 36% of the PRA market and roughly 10% of the PM universe. These funds acquire real estate such as office, commercial, industrial or residential units, as well as a combination thereof, or more specialised assets such as assisted living facilities or warehouses. Sub-strategies include core/core-plus, value-added and opportunistic, as well as distressed, debt and secondary.47 For the latter three strategies, little information is available. They differ significantly in focus, strategy, character of underlying assets, level of manager involvement, leverage and other factors, all of which result in differing return and risk profiles.

Database provider Preqin estimated that as of June 2017, PRE funds managed USD 811 billion, of which USD 245 billion was ‘dry powder’. North America represented 57.9%, Europe 25.9%, Asia 11.5% and the rest of the world 4.7%. Opportunistic PRE funds had USD 98 billion of dry powder, value-added PRE funds USD 61 billion, debt PRE funds USD 49 billion, core PRE funds USD 16 billion, core-plus PRE funds USD 11 billion and distressed PRE funds also USD 11 billion.

While listed real-estate funds provide investors with access to plain vanilla core real estate, PRE funds dedicated to core and core-plus differ. PRE implies a change of assets, leading to a capital gain. Core PRE funds invest at the lower end of the risk spectrum, acquiring existing sound and stable assets (office, retail, industrial and/or multi-family residential) in prime metropolitan locations and established markets. The strategy might consist of upgrading the tenant base, or increasing the leasing rate further, or shifting the duration of contracts and/or operating mild improvements on the building. A pure buy-and-hold strategy is possible but limits the potential capital gains. Properties are already well maintained at acquisition time and require little or no capital injection. This strategy uses moderate leverage (15–30% of the value of the asset). Core PRE performance is primarily yield-driven (90–100%) with limited capital gain contribution (0–10%). Holding periods tend to be long (10 years or more).

Core-plus PRE funds invest in properties that are similar to the core sub-strategy, but require more work and/or are located in prime or confirmed upcoming areas. The quality of buildings might be lower and require enhancement. Some buildings might need to be repositioned and their tenant base to shift. This strategy uses leverage (30–50%) and usually requires a moderate capital injection. Core-plus PRE performance is also primarily yield-driven (80–90%) with limited capital gain contribution (10–20%). Holding periods also tend to be rather long (7 years or more).

Value-added (VA)48 PRE funds focus on properties located at prime or secondary locations and that require more active involvement from the fund manager. The purpose of the intervention is to upgrade the building by redeveloping, refurbishing or repositioning it and/or change the tenant base (lease-up). Fund managers need to be able to identify and source appropriate target assets, implement relevant property and physical improvements and tenant-level strategy and provide ongoing asset management. Beyond the plain vanilla assets

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