Real estate investment is one of the most lucrative forms of capital multiplication. The real estate market is constantly growing and it is the least risky sphere of capital investment, however, it requires significant investment funds. To increase access for the less wealthy, special real estate funds are created to allocate assets to investors who want to start their adventure on the real estate market.
The division into different categories of funds is made on the basis of the risk and rate of return of a given investment. They range from conservative to aggressive and are defined by both the physical attributes of the property and the amount of debt used to capitalize a project. We distinguish the following types:
The term “core” refers to real estates located in high-quality locations with high-quality tenants. Core property investors are looking to generate stable income with very low risk. These properties require very little hand-holding by their owners and are typically acquired and held as an alternative to bonds, generating stable and consistent cash flow to their owners and their values tend to be the least volatile.
In terms of property class and profit prospects, these funds are similar to core funds, but with the low or moderate risk profile. Core plus property owners typically have the ability to increase cash flows through minor property improvements, management efficiencies or by increasing the quality of the tenants. The difference from previous funds is the fact that profit is not so easy to predict and core plus investment requires more active participation in property.
Value-add properties often have little or even no cash flow at acquisition but have the potential to produce a tremendous amount of cash flow once the value has been added. These buildings often require major renovations, repositioning or reducing vacancy rates, which require a deep knowledge of real estate, strategic planning, and daily oversight by their owners. These investments involve a medium to high level of risk.
They carry an even higher risk than previous funds. This is related to the condition of the property, which often requires fundamental changes, building development, and even utility reposition. Investors may not get return for more than three years, and the profit depends on the added value.
This fund targets “distressed property”, which means that the owner of the property is in arrears with mortgage payments or property tax bills and when the property is being liquidated under bankruptcy proceedings. The attractiveness of such an investment is supported by the fact that the purchase price of this property is usually much lower than the market price, which allows, after appropriate operations, to sell it at a much higher price.
With real estate debt investments, investors act as lenders to property owners, developers or real estate companies sponsoring deals. The loan is secured by the property, and investors earn a fixed return based on the loan’s interest rate and the amount they’ve invested. This type of investment typically applies to commercial projects such as multi-family housing, shopping centres or construction loans.
REITs are a type of investment fund, often listed on the stock exchange, allowing individual (small) investors to collect funds in real estate. REITs allow anyone to invest in portfolios of real estate assets from various sectors through the purchase of individual company stock or through a mutual fund or exchange traded fund. The main source of income for REITs is rents from real estate such as offices, residential buildings, hotels, industrial and medical buildings. The undoubted privilege of these funds is the exemption from taxation, such as CIT exemption on REITs in the US, or setting much more favourable tax rates.
The current legislation in Poland provides for only two legal forms of operation of investment funds – open and closed. The second one, are much more popular due to the possibility of direct investment in real estate and the institution of the Investment Fund Society, which deals with the management and representation of the fund, which gives investors a greater chance of profit, with reduced risk. The legal status of REITs in Poland remains unregulated to date, despite the start of work in 2016 to introduce this entity into the Polish legal system. This means, that it is only possible to invest indirectly in such funds, which brings about the domination of foreign capital in the Polish real estate market. In an effort to offset the dominance of foreign entities, work on the REIT bill resumed in late 2020. Introduction of appropriate legislation will undoubtedly contribute to the development of the real estate market in Poland and enable the creation of funds based on fully Polish capital, which gives the possibility of achieving huge profits.
The year 2020 in the real estate funds market saw one of the worse results in terms of capital raised and compared to the record year 2019 ($164.5 billion for a total of 382 funds), the value of capital raised was $102.6 billion for a total of 250 existing funds. The first half of 2021, saw $49.9 billion of capital raised by 85 funds in existence. There is undoubtedly a downward trend, due to the impact the pandemic has had on the real estate market, causing a significant number of funds to close.
Fundraising in 2020 for these funds saw a significant drop from the record year of 2019 from $28 billion to $15.7 billion and a drop in the number of funds from 55 to 24. The first half resulted in only $1.6 billion of capital raised. The reason for such reduced performance is, of course, the impact of the pandemic on the functioning of the markets, which prompted investors to invest capital in higher-risk funds. The second half of 2021, however, may bring an improvement in performance due to fund activity in industrial, housing and healthcare.
This type of fund, from 2019 onwards, has seen increases in the amount of capital raised, while the number of funds has fallen. We are talking about $30.6 billion raised in 2019 and $31.2 billion in 2020. The first half of the current year, with $19.2 billion, makes it optimistic for the rest of the year and is projected to achieve a record financial result since the financial crisis. Funds have begun to show increased interest in the online shopping sector, booming due to the pandemic.
From 2019 to 2020, there was the biggest drop in the value of capital raised by these funds, down $53.7 billion. The first half of 2021 saw $23.1 billion in capital for 39 funds. This could result in a significant gain in the second part of the year, due to hundreds of funds open, many from firms familiar to market participants, aiming to raise billions of dollars.
These funds compare much more modestly with other types. The largest amount of capital raised was in 2017 at $36 billion. This number declined sharply to stand at 15.9 billion for 28 funds in 2020. The first half of 2021 saw funding of $6 billion. As of 2018, debt funds are spending capital faster, than they are raising it. No significant growth is expected given the number of only six funds open and targeting amounts over $1 billion each.
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2. Michael Episcope, What are Core, Core Plus, Value-Add and Opportunistic Investments?, Origin Investments 21.02.2018, online: https://origininvestments.com/2018/02/21/what-are-core-core-plus-value-added-and-opportunistic-investments/,
3. Steve Byrne, The Do’s And Don’ts Of Investing In Distressed Properties, Forbes 5.04.2021, online: https://www.forbes.com/sites/forbesbusinesscouncil/2021/04/05/the-dos-and-donts-of-investing-in-distressed-properties/?sh=43583455628f,
4. Michael Episcope, How Debt Financing Benefits Commercial Real Estate Investors, Origin Investments 28.05.2019, online: https://origininvestments.com/2019/05/28/debt-financing-benefits-commercial-real-estate-investors/,
5. How Real Estate Debt Funds Work, Alpha Investing, online: https://www.alphai.com/articles/how-real-estate-debt-funds-work/,
6. What’s a REIT (Real Estate Investment Trust)?, Nareit, online: https://www.reit.com/what-reit,
7. Adam Hayes, REIT vs. Real Estate Fund: What’s the Difference?, Investopedia 22.04.2021, online: https://www.investopedia.com/ask/answers/012015/what-difference-between-reit-and-real-estate-fund.asp ,
8. Adam Roguski, Polskie REIT–y mogą narodzić się jesienią, Parkiet 21.02.2021, online: https://www.parkiet.com/Parkiet-PLUS/302219997-Polskie-REITy-moga-narodzic-sie-jesienia.html,
9. Czym są fundusze inwestycyjne REIT?, Business Insider 31.03.2021, online: https://businessinsider.com.pl/poradnik-finansowy/reit-zasady-funkcjonowania-funduszu-struktura-zalety/tkvlcf8 .