What this module covers
Owning a rental property directly and investing in private real estate alongside other investors are different activities. This module describes how private real estate investment works: how it differs from listed real estate investment trusts, how a syndication between a general partner and limited partners is structured, the three main strategies by risk and return, the factors used to evaluate an investment, and what the class requires of the capital committed to it. A worked example sets out how a projection's assumptions can be tested.
- Private and listed real estate
- How a syndication works
- Core, value-add and opportunistic strategies
- Evaluating a private real estate investment
- What the asset class requires
Private and listed real estate
A real estate investment trust (REIT) that trades on a stock exchange gives an investor exposure to real estate, but its units trade like shares. The price moves every trading day, and it tends to move with the broader equity market. When stocks fall, listed REITs usually fall too.
Private real estate works differently. The investor holds an interest in a property directly, or in a fund or partnership that owns properties. There is no daily trading. The holding is valued periodically, usually quarterly or annually, and its return comes from the rent the property earns and from any change in the property's value when it is sold, rather than from the price the stock market puts on it from day to day.
Less frequent valuation is not the same as lower risk. A property valued once a year shows smaller reported swings than a listed REIT, but the underlying value of the building can still move, and the reported figure reflects it only at the next valuation.
The trade-off is liquidity. A listed REIT can be sold in seconds. A private real estate investment may commit capital for five to ten years.