We’ve helped many foreign high net worth clients with investment in real estate investment trusts. Recently, some clients mentioned the advantages of private equity real estate funds to us. What are the major factors to be considered when choosing these two investment vehicles?
Pros for REIT: stable returns and safe. Cons for REIT: no value adds or upside in terms of ROI, with limited ability to provide a value add or upside to any of the assets within the portfolio. Pros for private equity: value add, upside, higher equity multiples, IRRs shorter period of investment (i.e., three to five years). Cons for private equity: risk of losing capital investment as a passive investor, potential threats within investment in the real estate sector.
Investing in REITS has a tax advantage in that there is no FIRPTA tax if less than 5 percent is owned and sold. Both REITS and private equity investments enable a single level of tax. From a management perspective, and depending on the size of the investment, you are likely to have better voting rights in a private equity vehicle.
Public REIT stock is very liquid and can be bought and sold on one days' notice. Private equity is closed in investment horizon, so your money is tied up for seven to 10 years and not liquid, and the manager gets a large fee and profits interest for performance that is not payable to REIT managers. REITS also generally have leverage maximum metrics and PE firms generally use more leverage, which can increase returns but also increases risks. Those are the biggest differences but there are many, many others.
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