Fitch puts together some interesting numbers on the extent of holdings by private real estate funds:
They account for one-sixth of $2 trillion in total net assets in private equity, says the London firm Private Equity Intelligence, which tracks the industry. A year ago the most closely studied funds in the U.S. were holding $213 billion in commercial real estate equity, leveraged 70% on average.
Fitch also touches upon some interesting thoughts comparing the performance of private real estate funds against public REIT stocks.
Instead of focusing on these interesting thoughts, Fitch focuses on how the real estate fund performance is a black box revealing little about their current returns.
Fitch evidently does not understand the real estate market.
Real estate is a very illiquid asset. The equity value of the commercial real estate may have decreased. (If you compare your real estate to the sales of comparable real estate.) Few funds take on the expense of an annual valuation. But that valuation makes no difference until you sell the real estate. As long as the real estate is throwing off enough income to pay debt and expenses, you can just sit back and own the property.
That is exactly what is happening right now. There are very few commercial properties for sale and even fewer are actually selling. The exception is a property owner with liquidity concerns. Harry Macklowe being the most public case: Harry Macklowe Doesn’t Own Those Seven Buildings Anymore.
The investors in private real estate funds are smart and know what they are getting into. They know they will have to pay fees to the sponsor/manager of the fund. They know their investment is illiquid and that it is investing in illiquid assets. They know some funds will perform well and some funds will perform poorly. They also know that the performance of the fund will not be known for years after they make their first investment in the fund.
That does not mean that private real estate funds are the next real estate disaster.