Real Estate in a Macro Context

Real estate equity investments are made by anybody with the money to do so. You could be a single individual investing out of a personal LLC, a family office, a multinational corporation, a specifically structured real estate investment trust, or a real estate private equity fund. At leveraged breakdowns, we focus pretty specifically on the real estate private equity funds space. But when you’re bidding on an asset, you’re competing against anybody with the capital to buy whatever you’re interested in. Thus, demand from other investors is a key driver of private equity real estate returns.

Macro Influences

Real estate equity investment are just as influenced by macroeconomic trends as any other sector. The trend we care most about is returns. Let’s say you have a pension fund that absolutely must hit 8.0% growth per year. If low-risk corporate bonds are yielding about that much, then you’re happy parking your capital there. But if bond yields start to drop, you need to find another asset class to invest in to hit your 8.0% return threshold.

Real Estate as an Alternative Asset Class

In this low-rate environment, a lot of investors have found themselves in this exact predicament. With stable bond yields diminishing, managers of institutional capital with return hurdles to meet had to find another place to invest. A lot of institutional capital continues to see commercial real estate as a valid alternative to things like bonds and preferred equity notes. Here are a few reasons why this is the case:

1. Real Estate is often backed by credit of similar quality to bonds. Office buildings are the most clear example. The same tenants that support AAA credit also rent office space, such as Apple, Google, Public Sponsored Entities, etc. And if you’re willing to increase the risk premium, you can shift to riskier office assets with smaller, less well-credited tenancy.
2. Real Estate is Tangible. It might seem silly, because most investors hardly ever physically interact with their buildings any more than a bond manager touches their bonds, but people really appreciate how real estate is tangible and real. There is a physical edifice and a piece of land underneath every fee simple real estate investment.
3. Private Equity Real Estate Returns are generally above corporate bonds, ranging from ~8.0% for core strategies to >20% for opportunistic investments
4. Operating Real Estate Pays a Predictable, Bond-Like Coupon: Operating real estate collects rents, covers its expenses, and flows the remaining cash to its investors. This cash flow positivity is attractive for many institutional investors. Developments of course don’t generate positive cash flow. However, they can be seen as a great way to make >20% returns for investors willing to swallow the risk.

Learn with Leveraged Breakdowns

If you’re looking to learn how to master the real estate private equity game, check out all that Leveraged Breakdowns has to offer. We are a team of Manhattan megafund real estate investors dedicated to bringing the insider perspective to outsiders hungry for a chance to break in. Our goal is to teach you everything essential to land a job in this exclusive industry and start ahead of your competition once you hit the desk.