Real Estate Private Equity (REPE) vs. Investment Management
The key differentiator between REPE and Real Estate Investment Management is the dominant fund structure – Private Equity leans towards closed-end funds while Investment Management leans towards open-end funds.
- Closed-end funds have an end date which requires the manager to deploy capital in a manner that fits within the fund life.
- Open-end funds have no end date and, therefore, offer more flexibility to the manager.
While this delineation generally holds, you will come across firms that manage both closed-end and open-ended funds – some will describe themselves as REPE, while others will describe themselves as Real Estate Investment Management.
Real Estate Investment and Asset Management
Real Estate Investment and Asset Management firms are generally smaller, entrepreneurial firms and often more more capital-constrained than their larger counterparts – REPE and Real Estate Investment Management firms.
While a REPE or Real Estate Investment Management firm might own and manage 50-100 (or many more) properties at any given time, a Real Estate Investment and Asset Management firm may own and manage just 10-20.
Because they are smaller, Real Estate Investment and Asset Management firms often acquire and manage non-institutional quality properties or partner with larger real estate owners (REPE or Real Estate Investment Management firms) to purchase properties.
Because they bring less capital to the table, these firms bring value to a partnership by committing more time, energy, and local expertise to an investment.
Institutional Grade vs. Non-Institutional Grade Real Estate
- Institutional grade real estate is generally larger (in size and price), professionally managed, has “brochure-like” appearances, faces little risk of obsolescence during a typical investment period, and is lower risk.
- Non-institutional grade real estate can be owned by anyone. These types of properties are typically smaller, not professionally managed, deteriorating, and riskier. Institutional grade is not necessarily permanent – markets can worsen, properties can deteriorate, and investor preferences can change.
Real Estate Development
Property Developed by Trammell Crow
Real Estate Development differs from Real Estate Investment Management and Real Estate Investment and Asset Management in that developers build properties from scratch while investors acquire existing properties.
The size, structure, and strategy can vary just as much on the development side as was discussed on the investment side. To be clear, Real Estate Development is still real estate investing, but in this context, we are delineating between firms that specialize in buying and managing existing properties versus those that specialize in building properties.
While some Real Estate Development firms pursue a strategy of partnering with larger capital providers to build and sell properties, others will have more permanent capital sources and pursue a strategy of building and then continuing to own properties. And, of course, some Real Estate Development firms do both. Generally, the lifecycle of developments is much longer than that of acquisitions – it’s not uncommon for a Real Estate Development firm to pursue only a handful of projects over the span of a decade.
Real Estate Investment Trusts (REITs)
Prologis Property
Real Estate Investment Trusts, or REITs, are typically public companies that own and operate real estate. Rather than raising capital from private sources, REITs raise debt and equity in the public markets. Investing in a REIT is meant to parallel investing in real estate where an owner derives cash flow primarily from rents (current cash flow). As public entities, REITs are subject to much stricter requirements than private owners of real estate.
There are two REIT requirements worth keeping in mind:
- REITs must invest 75% of total assets in real estate and derive 75% of income from rents
- REITs must pay a minimum of 90% of taxable income to shareholders
Because REITs are publicly traded and report earnings quarterly (among other reasons), they tend to have a much lower risk tolerance than private investment firms, which results in REITs’ portfolios consisting of primarily core assets, an aversion to redevelopment and development, and much less acquisition and disposition activity. Asset management roles are featured prevalently at most REITs.
This article specifically discusses publicly traded REITs, but there are a number of other types of REITs:
- Public Non-traded REITs are registered with the SEC like any other public company, but they are not traded on national securities exchanges. This results in less liquidity, but managers can focus on long-term objectives rather than responding to daily price fluctuations and quarterly earnings.
- Private REITs are not registered with the SEC and are not listed on a public exchange. Like Public Non-traded REITs, they are less liquid and are not tied to the daily and quarterly demands of public companies. In addition, the regulator requirements are far lower. Private REITs are only available to accredited investors to invest in real estate in a structure focused on income-producing assets and current cash flow for investors.
- Mortgage REITs, or mREITs, are REITs that lend directly to real estate owners or indirectly by purchasing mortgage-backed securities. mREITs earn income on the interest spread they collect on loans. They can be publicly traded, public non-traded, or private.
- Hybrid REITs pursue both equity and debt strategies, and can be structured similarly to the previously discussed types of REITs.
Real Estate Operating Companies (REOCs)
Crow Holdings – Old Parkland Hospital
Real Estate Operating Companies, or REOCs, like REITs, are companies that own and operate real estate.
Rather than raising capital from private sources, publicly traded REOCs raise debt and equity in the public markets.
Unlike investing in a REIT, investing in a REOC is like investing in any other company in which the cash flow is derived from several activities.
In the case of Real Estate Operating Companies, cash flow is derived from rent, buying and/or developing properties, and then selling them, and managing properties for others. Similar to REITs, REOCs can also be private companies.
Real Estate Brokerage Firms
Real estate brokers are a key intermediary in the real estate ecosystem. Brokers serve as facilitators of real estate transactions on both the leasing and sales side – we’ll focus on real estate investment sales brokerage.
In simple terms, investment sales brokers connect buyers with sellers and collect a fee for doing so. At the heart of being an effective investment sales broker is being well-networked, but at the junior level, it’s about market analysis and valuation. Larger brokerage companies are organized similarly to investment banks, in that the senior brokers focus on networking and interfacing with clients, while junior brokers spend their time creating marketing materials and financial models.
Real Estate Lenders
Real Estate Lenders provide debt financing for real estate transactions. The universe of lenders varies widely, from life insurance companies (most conservative) to debt funds (most aggressive).
More aggressive lenders are sometimes structured so that they can own and operate properties in the scenario that a borrower defaults.
Real Estate Lenders underwrite and analyze real estate transactions like owners, albeit with a slightly different perspective.
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