For those looking to diversify their portfolios and take advantage of the lucrative opportunities in the real estate industry, co-investing in real estate has emerged as a potential alternative. Collaborative investing entails combining resources with others to buy and oversee properties as a group, which has many advantages over investing alone. In this article, we'll discuss the merits of real estate co-investing and explain how it can help you make money while reducing your exposure to risk.
Understanding Equity Co-Investment
Understanding how equity co-investment differs from conventional investing strategies through its unique structure is essential. Equity co-investors actively invest alongside the private equity firms in an operating company, as opposed to investing through a private equity fund, where institutional investors rely on the knowledge of the private equity firm to make investment decisions.
In this model, the institutional investor is required to take part in each investment while the private equity firm maintains control over the portfolio company throughout the investment lifespan. This differs from the traditional strategy, in which institutional investors contribute to the primary private equity fund and give the private equity company the power to make decisions.
A distinct set of agreements is created to provide equity co-investment options. Institutional investors communicate their interest to the private equity company by filing an agreement or letter of interest. It is significant to emphasise that the private equity firm has the option but not the obligation to provide co-investment options.
This unusual investing strategy gives co-investors a direct share in the target company, providing a unique approach for diversification and perhaps even higher returns.
Structure of an Equity Co-Investment
Source: Corporate Finance Institute
Benefits of Real Estate Co-Investing: Unlocking Value and Reducing Risks
Risk Mitigation: Decrease Investment Risk
Investors can reduce risk by spreading their investment across a number of properties by co-investing in real estate. Because of diversification, each asset is exposed to fewer risks, which reduces the impact of potential downturns or problems with a particular property. By dividing the risk among several participants, co-investing improves the stability of the portfolio.
Co-investing in real estate allows investors to engage in property ownership in a passive way. They can make use of the skills of seasoned experts who handle day-to-day operations, property management, and decision-making, such as real estate developers or asset managers. While still reaping the rewards of real estate investing, this passive strategy frees up time and resources for investors.
Deal Selection: Pick the Investments You Want
Co-Investing offers the chance to pick a particular real estate project or asset in line with personal investment preference. Investors can select deals based on a variety of factors, including geography, property type, risk tolerance, estimated returns, and others. With this degree of control, investment plans may be customised in line with individual investment objectives.
Tax benefits associated with real estate investments can include mortgage interest, real estate depreciation, and operational expense deductions. Investors can take advantage of certain tax deductions, such as pass-through deductions from partnerships or limited liability corporations (LLCs), by co-investing. These tax benefits have the potential to greatly increase overall investment returns.
Greater Flexibility in Investment Possibilities
Co-investing provides more flexibility in terms of investment opportunities. It enables investors to take part in bigger, more rewarding ventures that might otherwise be out of their individual financial reach. A single investor could not have been able to access prime properties, commercial developments, or diverse portfolios without the help of a resource pool.
Risk-Sharing and Relationship-Building
Co-investing encourages investor cooperation and teamwork, which strengthens investor ties. The shared knowledge gained from handling real estate investments fosters trust and opens doors for information sharing. Co-investing also improves overall risk management by distributing investment risk across several parties.
Due diligence and information: Having Access to More Information
By participating in the transaction as a co-investor, investors can gain access to the pooled knowledge, skills, and due diligence efforts of other co-investors and professionals. This information can be used to improve risk assessment, decision-making, and confidence in the potential of an investment.
Comparing co-investing to solo investment, the fee structures are generally more favourable for the latter. Investors can negotiate cheaper fees, management costs, or profit-sharing agreements with outside service providers by combining their resources. This may improve the investment's overall financial performance and raise returns for co-investors.
Investment Trends In Family Offices
Three important family office investment patterns are outlined in a Knight Frank analysis.
1. Family offices are recruiting qualified real estate experts and are in direct competition with institutional investors in transactions.
2. Alternative real estate asset investments in things like data centres, medical facilities, and student housing are on the rise.
3. There is an increase in club deals and deal-by-deal co-investment strategies to share exposure to some larger assets.
These patterns indicate a transition away from blind pool investments and towards a more focused allocation of direct real estate. Professional investors have long used blind pool fund investments as their preferred form of capital allocation. They provide investors with a high level of diversity, a standardised configuration, and a one-stop shop. The alternative direct deal-by-deal investment strategy has nevertheless emerged as a preferred investment strategy for some professional real estate investors due to its limitations, including its strict investment guidelines, commitment-based approach, and higher cost structure. Co-investment options, such as joint ventures, club transactions, and sidecar investments, have emerged as a crucial service provided by the sector. The top 20 managers, according to PERE, raised more than US$29 billion for sidecar investments. Partial-ownership real estate transactions have averaged around US$36 billion over the last six years, accounting for 6.3% to 9.5% of the market for private real estate transactions.
Factors Affecting UK House Prices in 2023
Mortgage Rates and the Cost of Borrowing
The Bank of England's decision to raise interest rates in 2022, with additional increases possibly occurring in 2023, has had a significant impact on house prices. The cost of borrowing increases as mortgage rates rise, which may cause home prices to decline. Variable mortgage rates have increased by almost twice as much as they were over the previous year, as the Bank of England has seen, underscoring the possible impact on the housing market.
Affordability: Accessibility for Potential Buyers
In the UK, affordability continues to be a significant factor in determining property prices. Homeownership has become more and more out of reach for many people due to high housing costs, low or stagnant wages, high debt levels, and rising living expenses. Home values might decrease as a result of decreased demand due to affordability issues. According to data from the Nationwide Building Society, the ratio of property prices to salaries has increased significantly since late 2000, especially in London, making it more difficult for prospective homeowners to enter the market. In certain UK regions, mortgage payments now consume more than 60% of first-time buyers' net income, further compounding the problem of affordability.
Economic Growth: Impact on Employment and Consumer Confidence
The predicted slower economic growth in 2023 compared to the previous year would have an impact on the housing market. A weak economy may result in job losses and weakened consumer confidence, which could have a negative impact on home prices. The UK economy is expected to decrease by 0.3% in 2023, then grow modestly by 1% the following year, according to the International Monetary Fund (IMF). The dynamics of the housing market and consumer behaviour may be impacted by these economic situations.
Exogenous Factors: Economic Instability and Uncertainty
External factors like the ongoing economic effects of Brexit, skyrocketing inflation, and global catastrophes like the war in Ukraine are what cause economic instability and uncertainty. The cascading effects of these external factors on the housing market could affect house prices in the UK. Understanding these factors' possible impact on the real estate market requires constant monitoring and evaluation.
House price Forecasts for the UK in 2023 and 2024
Several institutions have provided predictions regarding the direction of the UK housing market in the coming years. Notably:
Savills predicts a 10% decline in house prices in 2023, then a modest 1% increase in 2024.
Their forecast suggests a 5% decrease in house prices for 2023, with a subsequent 2% increase in 2024.
They predict a 3% decline in house prices in 2023 and a 1% increase in 2024.
Their forecast predicts a 5% decline in house prices in 2023 and a 1% increase in 2024.
These forecasts collectively indicate a potential slowdown or even a decline in house price growth compared to previous years. However, it is essential to recognise that actual changes in the housing market can deviate significantly from these predictions due to the influence of various individual factors.
It is important for individuals and stakeholders to regularly monitor market conditions, economic trends, and other pertinent factors to stay informed about the evolving dynamics of the UK housing market.
Co-investing in real estate offers benefits such as risk reduction, passive investment, deal selection flexibility, tax advantages, and access to larger investment opportunities. Mortgage rates, concerns about affordability, economic growth, and external variables like Brexit will all have an impact on UK home prices in 2023. Savills, Nationwide, Halifax, and Capital Economics, among other organisations, have made predictions about a likely halt or drop in house price rises. However, actual market moves could differ from these projections. Effectively managing the property market requires constant market monitoring and knowledge.
Co-investing in real estate with Novyy opens doors to a world of investment opportunities while minimising risk and maximising returns. With their portfolio expertise and foreign national loan options, Novyy empowers investors to diversify their portfolios, capitalise on the real estate market, and achieve their investment objectives.
Please Note: Nothing on this website should be construed as tax advice. Information here is meant to be a general overview only and Novyy does not provide tax advice. Please consult your tax professional for further information on any matters which may be relevant to your individual tax circumstances.