Value Creation by Real Estate Funds

Abstract: This paper presents an overview of real estate private equity funds and their rapid growth in the last two decades. We describe their origin, strategies and show how they are structured. We provide an extensive overview over the investment and evaluation process applied by real estate funds and the rationale for investing in these funds from an investor perspective. Essentially, we aim to identify and outline the value drivers behind real estate private equity investments. In addition to financial theories, we have included a case study illustrating how a Swedish real estate fund added value to its grocery store portfolio through active management and partnership with a foreign local player. We find that real estate as an asset class has provided superior risk adjusted returns compared to the equity market. However, we acknowledge several potential biases to real estate return indices and discuss their potential impacts on our results. Through our interviews with industry professionals and previous research we discover two main reasons for investing in real estate funds. First, investors wish to invest without compromising the diversification argument, as they avoid tying up capital in directly owned properties. Secondly, investors see value in the unique management expertise of real estate funds and their ability to operate in foreign or less competitive markets. We find that a main source of value creation behind real estate private equity investments is their ability to transform less attractive properties into the ones that are sought after by institutional investors.