Real Estate Funds

Real estate funds are investment vehicles that generally invest in real property, portfolios of actively or non-actively traded equity, fixed income, preferred stock or loan securities of real estate companies, and mortgage-backed securities.

In general, real estate funds invest in return-oriented portfolios that provide income and/or the potential for long-term capital appreciation. A real estate fund may be structured as a limited partnership similar to a private equity fund, a company, or as a REIT. Typical real estate fund
investors are high net worth individuals and institutions, though investors in certain types of real estate funds, such as a REIT, may include retail investors.

Institutional investors have been attracted to real estate investments because the real estate market can offer stable returns that can be comparable to both public equity and debt markets but with a historically low correlation to price changes in those markets. Many professional portfolio managers employ this benefit of real estate investment to diversify an overall investment portfolio by combining several asset classes. As a result, allocations of capital to global real estate investments have grown significantly in the last 15 years, and this trend has also occurred in Asia over the last five years.

Real estate investment has been a rapidly growing asset class, and we expect this trend to continue in light of increased demand for real estate assets in general and the return characteristics of an investment in such assets, which is similar to the return characteristics of an investment in private equity.




There are many types of real estate funds, the common ones are as follows:

REITs
REITs are public-listed investment vehicles that invest in real property. As REITs are listed on a stock exchange, their units are freely tradable. Typically, REIT investments are focused on properties that offer stable rental income such as office buildings, retail shopping centers, residential buildings, hotels and industrial warehouses. REITs are regulated investment vehicles that operate under certain restrictions and provide certain benefits to investors. The main restrictions include a requirement to pay nearly all income to investors through regular dividends, restrictions on carrying out any operating activity and incurring more than a specified level of debt compared to the assets of the REIT, a requirement to invest a majority of the
REIT’s capital in real estate and a requirement that unitholder approval be obtained in order to effect certain transactions such as the acquisition of a significant property. In terms of benefits, REITs allow investors to access real property assets and share the benefits and risks of owning a portfolio of properties which generally distribute income at regular intervals. In addition, REITs are generally tax pass-through investment vehicles or enjoy tax-free status. The manager of a REIT generally provides external management to the REIT, and its duties include sourcing and completing acquisitions, asset enhancements and generally improving the performance of the properties held by the REIT.

A REIT manager typically earns:
(i) base fees paid as a percentage of a REIT’s assets which it manages,
(ii) performance or incentive fees paid as a percentage of a REIT’s net property income, and
(iii) acquisition and divestment fees.

Private real estate funds
Private real estate funds are unlisted funds that generally invest in real property or non-actively traded securities in real estate companies. Investments made by such funds typically include various types of real property ranging from properties that offer stable rental income to properties that provide potential for substantial capital appreciation through development, major refurbishment or asset repositioning. Private real estate funds generally have specified terms with provisions to extend the term under certain circumstances. Qualified investors make a commitment to provide capital to the fund, and this capital is typically called by the fund on an “as needed” basis as investments are identified and returned through distributions upon realization of the underlying investments. Private real estate fund managers typically earn management fees on committed or contributed capital, transaction and monitoring fees as capital is invested and performance fees or carried interest based on the net profits of the fund. Performance fees or carried interest are often subject to a preferred return for investors and a contingent repayment if actual realized performance of thefund at the time of liquidation does not meet the specified requirements.