Real estate investments can provide stable cash flows and appreciation potential, but also carry risks like illiquidity and concentration. Co-investing with other institutions can help mitigate these risks and enhance returns. This article will analyze real estate co-investment strategies, including coinvesting in funds and direct joint ventures. We will also examine the benefits and challenges of real estate co-investments.
Coinvesting in real estate funds expands access while reducing costs
Many institutions lack the scale or expertise to invest directly in real estate assets. Coinvesting in real estate funds alongside a general partner (GP) provides exposure to institutional-quality assets without having to build an internal team. Co-investors benefit from the GP’s real estate experience, deal sourcing capabilities, and asset management expertise. This allows even small institutions to invest in commercial real estate opportunities that would normally be unavailable. Co-investing also reduces fees compared to investing solely as a limited partner. The co-investor avoids paying duplicative asset management and incentive fees on their portion of the investment.
Joint ventures allow investors to pool capital on specific assets
Institutional investors can also pursue joint ventures to acquire, develop, or reposition real estate assets. In a typical JV, two or more institutions commit equity as co-investors in a specific asset rather than a comingled fund. This directly aligns incentives and allows investors to select properties that fit their own criteria. JVs also facilitate larger deals by combining capital from multiple sources. For example, a pension fund partnering with a sovereign wealth fund on an office development. With predefined ownership stakes, JVs enable clear economic splits without complicated waterfall provisions.
Due diligence and governance are critical for co-investments
While co-investing can enhance real estate returns, it also introduces new risks that must be addressed. Extensive due diligence is required on both the asset and partner. Objectives, investment hurdles, and governance processes should be clearly defined. For fund co-investments, negotiation of side letter terms is key to ensure alignment with the partner GP. JV agreements should outline economic terms, ownership structure, exit timing, and decision-making. Strong governance prevents issues around control or information asymmetry between co-investors. Legal protections may be warranted against liability from the actions of partners.
Real estate co-investing allows investors to access deals at scale while mitigating risks. Proper structuring, due diligence, and governance are critical to realize the benefits. When executed well, real estate co-investments can provide attractive risk-adjusted returns.