What are REPEs?
Real estate private equity (REPE) is considered an alternative asset management class in which firms raise capital from outside investors, Limited or General Partners, and use it to acquire or develop properties.
Moreover, these firms try to improve assets by managing them and then selling them to profit. In addition, REPE firms raise capital for specific funds, where each fund has its own mandate and project. In simple terms, the firm runs several individual investments.
Therefore, after the project is concluded, investors expect to get their capital back plus a hefty return; this means that REPE are "closed-end funds". Globally, the vast majority of the large players in REPE also play a role in the traditional Private Equity business resulting in a different approach regarding their investments.
Investors and Conditions
Private Equity real estate firms collect funds from high net worth individuals (HNWIs) and institutions such as:
Pension Funds
Insurance Firms
Funds of funds
Endowments
Family offices
High-net-worth individuals
Most of the investors that fund these active management firms that can operate with strategies from new development and raw land holdings to complete renovations of existing properties or cash flow injections into struggling properties work as limited partners (LPs).
Hence, they do not participate in the business's day-to-day operations or have decision-making power; they will serve exclusively as investors. Moreover, LPs will have one general partner (GP) to supervise the daily operations. The GP might invest in the company and can be liable for the firm's debts; this may imply that personal assets can come into play when needing to pay off the company's debt.
For investors contributing significantly to the Assets under Management of REPE firms, it is mandatory to have a long-term outlook and a considerable upfront capital commitment, no lower than 250K$ for the initial buy-in and then follow-on investments over time. Investors usually have to keep their funds in the company for a dozen or more years regarding lock-up periods.
Moreover, profit distributions are usually slow due to the investments' long-term life and because they are not paid from outright liquidation (investors can not demand liquidation of their share) but instead from cash flow. Furthermore, it is vital to remember that an investment in REPE firms goes along with high costs.
Many well-known private equity real estate firms charge a 2-and-20 fee structure, meaning investors have to pay a management fee of 2% plus 20% of the realized profits of projects.
Strategy styles and returns
In real estate investing, there are four main types of strategies. These four strategies also hold for the private equity real estate world. However, comparing REPE firms with REITs, it is visible that REITs normally employ a more conservative strategy whilst REPE firms do not hesitate to employ a somewhat higher risk.
The four main strategy types which can be adopted are explained below:
REPE vs REITs
The lines between the two major Real Estate firms and their approaches are floating. However, some things help differentiate the different types of firms.
Real estate investment trusts (REITs) own real estate portfolios in predetermined regions and across different asset classes. Contrary to REPE firms, they do not trade their real estate frequently and rarely act opportunistically.
The money generated by a REIT is not fully reinvested normally but rather distributed to shareholders. REITs rarely have lock-up periods and charge lower fees for managing funds. A closer look at large REITs will also show less variety regarding different sectors and the geographic focus in REITs.
The more conservative nature of their business REITs also often profit from tax benefits either to the company itself or to stockholders profiting from tax-free dividends.
Nonetheless, while both companies operate in two different lines of business, there are exceptions. These exceptions are mainly because both types of companies essentially follow the same goal of creating value.
Important companies
Due to the ongoing Covid-19 pandemic, the real estate market has developed massively, with some markets being hit significantly and others seeing record-breaking numbers potentially fueled by Covid-19.
In the following, we want to outline some of the most interesting firms in the North American market, which exhibit an even more diverse picture than the European market.
REPE
Blackstone
Is the most known REPE firm by far. The company initially entered the real estate market via investments in the hotel industry in the 1990s. The value of Blackstone's real estate portfolio is currently at $448 bn. Blackstone is active in different market segments and has conducted a variety of opportunistic investments in recent times, such as the purchase of the Bellagio Hotel in Las Vegas. In total, Blackstone currently has $731 bn Assets under Management.
REITs
Vornado Realty Trust
Is an American REIT that primarily invests in office and retail properties. The company is one of the largest investors in Manhattan and has been hit severely by Covid-19. The stock of Vornado is down 40% compared to pre-Covid, and the newly emerged Omikron variant has brought additional volatility to the stock.
Prologis
Is the largest REIT in the logistics sector worldwide. It invests primarily in light industrial properties around the world. The Covid-19 pandemic has brought unseen growth to the light industrial market segment as E-commerce has been booming and retail shopping was impossible. Since the start of the pandemic, the stock of Prologis has almost doubled.
The chart below illustrates the performance of Vornado (VNO) and Prologis (PLD) in the last two years:
Portugal - Vanguard Properties and Bondstone
But after seeing a glimpse of the huge American market, let us have a quick look at the Portuguese market.
In Portugal, some firms have amassed several €100 m in Assets under Management. Despite this being only a fraction of the US volumes, it has to be noted that projects such as the Muda Reserve in Comporta are a sign of the capabilities and the remaining potential within the Portuguese market.
Summing up
Along with the lasting positive economic performance of the overall real estate markets, the business of those REPE firms with little Covid-19 exposure has been booming. Furthermore, many traditional PE firms continue to acquire new funds, with KKR securing another $4.3 bn recently. This indicates that the firms see further potential in the market and indicates that the high deal volume will continue at least in the short term.
AUTHORS:
Francisco Rei
Friedrich Bücker
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