Why an LP Investor Chooses Specific Real Estate Strategy

We’re often asked why an LP investor would choose a sector specific real estate strategy over a diversified real estate strategy. Executing any real estate strategy requires some research to ensure what you have chosen will work for you. /wp:post-content wp:paragraph {"align":"center"}

Page Contents

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Why Do Investors Choose a Specific Strategy?
What are the Steps to Evaluate Strategies?

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Why Do Investors Choose a Specific Strategy?

/wp:heading wp:paragraph We’re often asked why an LP investor would choose a sector specific real estate strategy over a diversified real estate strategy. PREA, Pension Real Estate Association, of which we’re members, recently released some research performed by Cambridge Associates that looked between the sector specific investors and the diversified real estate investors. They looked at both the net yield and also the risk profile. So this is generally the spread between yields. /wp:paragraph wp:paragraph The results were quite interesting. Investors that had a one year hold in a sector specific strategy, they outperformed the diversified real estate investors with also a one year hold by a whopping 1,300 bips. If you want a three year hold, the sector specific strategy investors outperformed by 180 bits. And a five year old over 200 bips and a ten year old. The sector specific investors in real estate outperformed the diversified investors by a whopping 320. All of this with potentially a safer risk profile. /wp:paragraph wp:spacer {"height":"27px"} / wp:heading

What are the Steps to Evaluate Strategies?

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#1: Evaluate the Sponsor

/wp:heading wp:paragraph A private equity firm is also the transaction sponsor. Therefore, they are responsible for finding the property and arranging all the additional information for that specific property. There are a few things to be on the lookout for when evaluating. These are experience and track record, investing their own money, compensation, differentiators, underwriting approach, best/worst deal, and references. /wp:paragraph wp:heading {"level":3}

#2: Evaluate the Offering

/wp:heading wp:paragraph It’s important for investors to ensure the opportunity they are pursuing aligns with their values and objectives. Since every investment opportunity is different, investors have to look at several factors during the due diligence process. First and foremost is the fund versus the deal. Following that are property type, the market, property features, returns, and strategy. Equally important, that many forget about, parking. /wp:paragraph wp:heading {"level":3}

#3: Evaluate the Deal Structure

/wp:heading wp:paragraph The structure of the deal impacts the investment significantly. Therefore, it’s important to ensure investors are looking at the general partners and the investment itself, limited partners, the capital stack, and the cash flow split. /wp:paragraph wp:heading {"level":3}

#4: Evaluate the Fees

/wp:heading wp:paragraph Fees are meant to cover salaries and costs, not be a money maker. Investors should be aware of what the fee structure will be on any investment opportunity. Typically, it will include an acquisition fee, investment management fee, setup and organization fee, admin fee, sales fee. However, fees can vary as well firm to firm and one investment opportunity to another. So investors should be diligent to read and ask the sponsor questions. /wp:paragraph