Rastegar: PE Real Estate Gains Momentum as Uncertainty Rises

Jul 21 2017 | 6:04pm ET

Editor’s note: The steady march of equity markets and fundamental shift in the direction of Fed monetary policy is encouraging many investors to explore corners of the investment universe in a search of instruments that can deliver consistent returns in all environments. One segment gaining new interest in this context is private equity real estate funds, says Rastegar Equity Partners founder Ari Rastegar in this contributed article, as income-focused, recession-resilient, and diversified commercial real estate funds can help mitigate downside risk while preserving upside potential. 

PE Real Estate Gains Momentum as Uncertainty Rises
By Ari Rastegar

Private equity funds have claimed an increasingly larger share of the commercial real estate market over the last 30 years. There are signs this growth will continue as institutional and

high-net-worth investors explore new ways of preserving and growing capital, such as adjusting asset allocations and making tactical moves into new segments of alternative investments. This might include exiting hedge funds and funds-of-funds, and boosting investments in private equity. There is a strong case to be made, in today's low-yield environment, for why those PE investments should target real estate assets.

First, although we tend to lump real estate into the "alternative" bucket, the asset class is squarely traditional in many ways. Barring a major disaster, property, as a hard asset, will continue to exist even if the dollar, stocks or other traditional investments lose their value. And as the 2008 financial crisis demonstrated, real estate can return to its original value and continue to grow after a loss. The fact that it is a hard, underlying asset almost defines it as traditional. This focus on consistent returns in all kinds of market environments requires a different mindset for investors accustomed to checking their portfolio with each ebb and flow of the market.

For any yield-starved investor, an income-focused, recession-resilient commercial real estate fund consisting of a mix of property types geographically dispersed throughout the U.S. can help mitigate downside risk while seeking to maximize upside exposure. That strategy works by targeting properties with an existing cash flow that can be increased over time by improving or repositioning the property.

Self-storage units, rented when downsizing a home or to accommodate an excess of belongings, have the potential to serve as recession-resilient property that can help lower risks and increase returns. Consumer demand has grown in recent years for the units, which typically have low overhead costs. Managers who choose to pursue smaller deals with these mom-and-pop businesses can equip units with online auto-pay capabilities, for example, reducing the cost and administrative burden of processing invoices and payments. They can also consolidate, or bundle properties together to create new investment opportunities. 

Investors should also consider fee structure with these funds. Hedge funds have gotten their fair share of flak for poor performance—or rather, for having high fees eat into what could have been a reasonable risk-adjusted return. But a PE real estate fund that does not have to charge other fees usually imposed by managers, and has the flexibility to adopt an incentive standard that departs from the traditional model, could translate into a better alignment of interests between investors and the firm.

We have every reason to believe the momentum will continue to build with these funds, seeking to help advisors solve for yield, correlation, diversification, volatility and performance issues. If people anchor funds in recession-resilient assets, they can become more opportunistic as they get further along on the capital stack. Rising interest rates bring challenges, but PE real estate also brings opportunity.

Ari Rastegar is the founder of Rastegar Equity Partners, a Dallas-based private equity alternative real estate firm focusing on income-producing, recession-resilient assets throughout the U.S. 

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