Private real estate partnerships tend to outperform institutional real estate investments by a significant margin for several reasons. First, they include a greater proportion of higher risk investments and value-add opportunities while institutional investors mostly buy seasoned and highly occupied properties with less upside. Second, the private investors use more leverage while institutional investors often use none.
Third, they consider smaller properties including those well below US$10m while institutional investors like to play in the large markets with big ticket minimums, and the required yields for the smaller investments are higher while institutional investors will accept single digit returns. Direct investments have some risk associated with the lack of liquidity, but this is true independently of scale, unless you select REITs, which up until now have been the best choice for smaller investors.
Last, private partnerships have aligned incentives with general partners providing some skin in the game, while institutional investment decisions are dominated by those who need to first execute on allocated capital and receive more compensation as a percentage of assets and less as promotes and shared returns.
It is great for the young aspiring investor who has perhaps $50,000 to invest and would like to be part of a diversified and higher-yielding fund
What does this have to do with designations?
Last fall, in the United States, we saw the definition of accredited investors change. Previously it was based on income ($200,000-plus per year minimum, $300,000 with a spouse) and wealth equal to at least $1m net worth, excluding personal real estate, cars or non-liquid assets. Individuals making above $200,000 will be in the top 11% of all Americans and at $300,000 will be in the top 4%.
So, with the old definition of accredited investors, those approved to invest in higher-yielding partnerships rather than pension fund allocations, was a fairly small group. It remains small, but today the definition of an accredited investor is expanded to include professional knowledge and awareness of the risks involved with investments in commercial real estate, rather than the old assumption that only rich people know what they are doing and nobody else does.
So, how do you prove you understand real estate risks and returns? By designations and degrees that demonstrate such knowledge. For example, the CCIM designation requires extensive training in real estate investment analysis, as does the MSRE degree, and for younger professionals who may not be making $200,000 a year yet but wish to allocate some investment funds into private real estate, at least now they have a way to be approved as accredited.
This is not a boondoggle for the investment fund managers, who will continue to rely on tried and true clientele, but it is great for the young aspiring investor who has perhaps $50,000 to invest and would like to be part of a diversified and higher-yielding fund than possible via the institutional route. Time will tell if this expanded pool of qualified investors takes advantage of their new elite membership status.
