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Real estate private equity: What it is and how it works

What is real estate private equity? Who are the other major players in real estate? Real estate private equity and other similar fields, defined.

Real estate private equity is primarily the business of capital allocation. Private equity funds have capital that they need to invest by purchasing income-producing real estate assets directly. They may also participate in a variety of other investments, such as buying operating platforms, funding developments for developers, and buying real estate debt.

On the other hand, in real estate development, capital allocation is only the start of the process. Once funding is in place, developers are involved in the day-to-day project and construction management of a project, which includes everything from government relations, architectural and engineering design, to sales and lease-up of the asset.

Real estate hedge funds are also in the business of capital allocation; they invest in more liquid assets. Since real estate is illiquid, hedge funds typically purchase publically traded shares of stock in existing real estate companies. Typically, real estate hedge funds invest in REITs.

In practice, a private equity fund may engage in all of the above, to varying degrees. It is dependent on whether or not the fund typically uses an OP (operating partner) to engage in development and/or value-add and project management. Some real estate private equity funds will also purchase shares of stock in existing real estate companies.

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