What is Real Estate Private Equity? (Based on US market but Very informative)

Real Estate Private Equity (REPE) or Private Equity Real Estate (PERE) refers to firms that raise capital to acquire, develop, operate, improve, and sell buildings in order to generate returns for their investors. If you’re familiar with traditional private equity, real estate private equity is the same, but with buildings.

As the “private” in “private equity” suggests, these firms raise capital from private investors and deploy that capital to make investments in real estate. There is little standardization to how real estate private equity firms are structured, but they all generally engage in five key activities:

Capital raising
Screening investment opportunities
Acquiring or developing properties
Managing properties
Selling properties

Capital is the lifeblood of any investment firm – without capital to invest, there is no firm. The capital raised by real estate private equity firms comes from Limited Partners (LPs). LPs generally consist of public pension funds, private pension funds, endowments, insurance companies, fund of funds, and high net worth individuals.

PERE strategy. They will carve out a portion of the risk/return spectrum and focus on transactions – regardless of property type and geography – that fit the specified risk profile and return targets.

The most high profile types of real estate private equity fund strategies are called “Opportunistic” or “Value-Add”, and refer to higher risk/return types of investments than the more conservative “Core” or “Core-Plus” strategies. In the image below you can see the return profile targeted across these different strategies.

This is an effective way for REPE firms to organize themselves because it sets clear expectations for a firm’s investors and allows the manager to diversify risk across geography and property type.

When you hear terms like “opportunity fund” or “targeting core investments,” they are usually referring to risk profile and return targets.

Property Type

REPE firms do not often constrain themselves when it comes to property type. In a scenario where they did, a firm would focus exclusively on one property type, hotels for example, and diversify their investments in other ways within the property type sector.

Property Type	Description
Multifamily	Multifamily real estate, or apartments, are defined as buildings containing 5 or more rental units. Multifamily properties are typically the most familiar to investors given their similarities to single family homes and are generally viewed as one of the least risky forms of real estate investment. Multifamily buildings represent approximately 25% of the total U.S. commercial real estate market.
Office	Office buildings include everything from skyscrapers to small single tenant office buildings. Rents and valuations are influenced by employment growth and a region’s economic focus. Due to the length of office leases and the sector’s correlation to the economy, a tenant’s credit quality is very important.
Retail	The retail sector comprises properties that house retailers and restaurants. Properties can be multi tenanted with an anchor tenant to drive traffic or single use, standalone buildings. The retail sector is the most diverse asset class with subcategories ranging from shopping malls to standalone restaurants. With the rise of e-commerce, the retail sector has become the least favored real estate asset class.
Industrial	The industrial sector houses operations for the storage and/or distribution of materials, goods, and merchandise. Typically single story and located outside urban areas along major transportation routes. Tend to have less than 15% office space, and modern facilities have high ceiling clear heights that allow for more storage space. Buildings may also include specialty features, such as cold or freezer storage for food. Industrial properties are the least operationally intensive asset class given their ease of construction, simple design, and lack of focus on aesthetics. With the rise of e-commerce, the industrial sector has become the most favored real estate asset class.
Hospitality	Hospitality real estate encompasses properties providing accommodations, meals, and other services for travelers and tourists. The hospitality sector primarily comprises hotels but also includes casinos and resorts. Relative to other asset classes, hospitality is the most operationally intensive because of the number of employees involved and the range of amenities such as full service restaurants, room service, valet parking, and event space. Because it caters to travelers and tourists, the hospitality is highly correlated with the broader economy and is therefore viewed as the most risky of the asset classes.

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