Private Equity Real Estate: Definition in Investing and Returns

Julia Kagan is a financial/consumer journalist and former senior editor, personal finance, of Investopedia.

Dr. JeFreda R. Brown is a financial consultant, Certified Financial Education Instructor, and researcher who has assisted thousands of clients over a more than two-decade career. She is the CEO of Xaris Financial Enterprises and a course facilitator for Cornell University.

What Is Private Equity Real Estate?

Private equity real estate is an alternative asset class composed of professionally managed pooled private and public investments in the real estate markets. Investing in private equity real estate involves the acquisition, financing, and ownership (either direct or indirect) of property or properties via an investment fund.

Private equity real estate should not be confused with an equity real estate investment trust, or equity REIT, which are publicly-traded shares representing real estate investments whose revenues are mainly generated through rental incomes on their real estate holdings.

Key Takeaways

• Private equity real estate is a professionally managed fund that invests in real estate.
• Unlike REITs, private equity real estate investing requires a substantial amount of capital and may only be available to high-net-worth or accredited investors.
• This type of investment is often riskier and costlier than other forms of real estate investment funds, but returns of 8% to 10% are not uncommon.

Understanding Private Equity Real Estate

Private equity real estate funds allow high-net-worth individuals (HWNIs) and institutions such as endowments and pension funds to invest in equity and debt holdings related to real estate assets.

Using an active management strategy, private equity real estate takes a diversified approach to property ownership. General partners (GPs) invest in a variety of property types in different locations, which can range from new development and raw land holdings to complete redevelopment of existing properties, or cash flow injections into struggling properties.

Private equity real estate investments are commonly pooled and can be structured as limited partnerships (LPs), limited liability companies (LLCs), S-corps, C-corps, collective investment trusts, private REITs, separate insurer accounts, or other legal structures.

Special Considerations

Investing in private equity real estate requires an investor with a long-term outlook and a significant upfront capital commitment—over $250,000 initially and follow-on investments over time. Little flexibility and liquidity are offered to investors since the capital commitment window typically requires several years.

Lock-up periods for private equity real estate can sometimes last for more than a dozen or more years. Also, distributions can be slow because they are often paid from cash flow rather than outright liquidation—investors have no right to demand a liquidation. Moreover, fund managers typically charge a 2-and-20 fee structure, costing investors 2% of invested assets per year plus 20% of profits.

The following category of investor invests in private equity real estate:

• Institutions (pension funds and nonprofit funds) and third parties, such as asset managers investing on behalf of institutions
• Private accredited investors
• High-net-worth individuals (HWNIs)

Funds created for individual investors generally require that the investment be funded at the time of the signing of the investment agreement, whereas funds created for institutional investors require a capital commitment. That capital is then drawn down as suitable investments are made. If no investments are made during the investment period specified by the agreement, nothing can be drawn from the commitment.

Private equity real estate investing is risky, but it can also provide high returns.

Private Equity Real Estate Returns

Despite the lack of flexibility and liquidity, this type of investment can provide high potential levels of income with strong price appreciation. Annual returns in the 6% to 8% range for core strategies and 8% to 10% for core-plus strategies are not uncommon.

Returns for value-added or opportunistic strategies can be considerably higher. That said, private equity real estate is risky enough that investors can lose their entire investment if a fund underperforms.

Private equity real estate funds became popular in the 1990s amid falling property prices as a way to scoop up properties as values fell. Previously, most institutional real estate investing adhered to core assets.

Types of Private Equity Real Estate Investments

Office buildings (high-rise, urban, suburban, and garden offices); industrial properties (warehouse, research and development, flexible offices, or industrial space); retail properties, shopping centers (neighborhood, community, and power centers); and multifamily apartments (garden and high-rise) are the most common private equity real estate investments.

There are also niche property investments such as senior or student housing, hotels, self-storage, medical offices, single-family housing to own or rent, undeveloped land, manufacturing space, and more.

The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.

The gross income multiplier is obtained by dividing the property's sale price by its gross annual rental income, and is used in valuing commercial real estates, such as shopping centers and apartment complexes.

A sublease is the renting of property by a tenant to a third party for a portion of the tenant’s existing lease contract.

Other Real Estate Owned is a bank accounting term that refers to real estate owned by a bank that is not directly related to the bank’s business.

The capitalization rate is the rate of return on a real estate investment property based on the income that the property is expected to generate.

A grantee is the recipient of a grant, scholarship, or some type of property. In real estate, the grantee is the one taking title to a purchased property.

A private placement is a sale of stock shares to pre-selected investors and institutions rather than on the open market.

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