Demystifying Real Estate Co-investing

Real Estate Co-investments is the next wave of alternative investments that have gained much popularity in USA, UK and China.

Watch our webinar where the RealVantage team would share about what co-investments are, how it typically works, and what an investor should be looking out for.

About The Speakers

Keith Ong | Co-Founder
Keith is an industry veteran with over 20 years of experience, he has transacted in excess of USD 3 billion across geographies, sectors and the entire real estate investment spectrum. He was the Assistant Director of Investment in ARA Asset Management, Director of Investment in Rockworth Capital Partners, and the Director of Investment Management and Capital Transactions for Firmus Capital.

Mao Ching Foo | Co-Founder
Mao is a veteran in technology and quantitative trading, he has traded over USD 10 billion in global equity markets through automated algorithms. He was the Chief Technology Officer at Funding Societies, and Quantitative Trading, Portfolio Management at Ronin Capital and Barclays Global Investors.

Transcript

0:00
Keith
Hi guys.

Thanks for tuning in. Thanks for tuning in to our webinar. I'm Keith, the Co-Founder of RealVantage. I hope everyone is safe and well. Joining me today is my Co-Founder, Mao.

0:15
Mao
Hello everyone. I hope everyone's well and safe amidst the situation and lockdown.

We'll be reaching out to you more frequently through webinars.

We hope you'll find this webinar useful and insightful in making your real estate investment decisions. We have planned for a series of webinars to help investors understand various aspects of the real estate business, provide market updates and an overview on how things are doing in these turbulent times.

Keith, over back to you.

0:45
Keith
Okay, so for today we'll be walking you through the fundamentals of real estate co-investments, it’s attributes and things that investors should look out for. With technology, the concept of investing in capital intensive assets such as real estate has gained a lot of interest. We will be highlighting some reasons behind it. Okay, let's get started. Today, we will segregate the topic into four parts. I will start by explaining the concept of real estate co-investment. Next, Mao will come to highlight the growth in this industry and the value proposition to investors.

For the last part, I will highlight some important factors to consider when you are choosing an online real estate platform. And we will end off with Q&A. On logistics. The panel to your right is where you can post your questions. We will address them at the end of the session.

Okay, let's start. The concept of co-investment is the pooling of capital to invest, given the capital intensive nature of the real estate, investors and managers. I find it mutually beneficial to work together to finance certain transactions, usually single properties or larger sets. So investors collaborate and share a part of the profits generated from the real estate investments. There are several characteristics to take note in co-investment; number one, the ownership of the asset is shared and usually, this is truly a vehicle or we call a single purpose vehicle.

Next, typically, all investors would have a common aim when they put their funds together. This is usually to maximise returns over an agreed period. Subsequently, there is a set of ground rules you follow. Someone is designated to be the decision-maker to steer investment or to make some key decisions. Next slide, please.

When you think about it, the co-investment concept is not new. It is actually relatively proven, tested and used regularly. To the left, you see the private equity real estate funds. However, it is essentially large institutions; such as pension funds, insurance companies and family offices that co-invest in real estate projects. They (large institutions) do it typically to a real estate fund. So they pull their capital together and put it with a fund manager.

On the other side of the spectrum, on a personal level, many folks come together to co-invest in a property. Among friends and family members, they pull their capital together. As you can see, the larger institutions do it in a more structured manner. However, the individual basis is informal. With the use of the technology available now, we are trying to procreate some structure and efficiency around this right. Hence co-investing through an online platform is essential to bring that institutional level of co-investing right down to the retail level.

Next slide, please.

So you might ask, how does technology make real estate co-investing different? Firstly, as we know, the use of technology to improve efficiency in investment management is evidently observed now. For instance, traditional ways of things can now be done much quicker, ranging from onboarding investors, the selection of assets, the execution of legal documents to the performance tracking of investments. All these functions now can be done online for investors. Investors have a much wider choice of investments that they can choose from and customised to their needs.

On the deal front, there is also a greater level of disclosure on the project and the information. And in terms of investment tracking, this has also enhanced with technology. With online dashboards, you can now zoom down into the particular deal itself. For instance, you can see how well it is performing. It can zoom up and look at the entire portfolio at a glance.

However, more significantly with technology, the aggregation of investors is now much easier. Through online networks, we can bring like-minded people together. And this goes beyond the traditional circle of friends and family. So what does that mean for you? With a wider pool of investors, this brings greater access, access to better deals, more sophisticated use and higher risk-adjusted returns. We will talk about this more later on.

Next slide, please.

This is a common question we get. So what is the difference between crowdfunding and co-investment? - what is the difference between traditional financial and investment? Well, crowdfunding is the practice of funding a project or venture by raising small amounts of money from large numbers of people, typically through the internet. Prominently there are some similarities, but there are also some major distinctions. Let me try to highlight some differences.

First, crowdfunding is used loosely and used for a wide range of projects from charitable causes - raising funds for an event and investments. For typical crowdfunding investment platforms, however, the platform usually plays the role of an organiser and arranger. They connect people with the funds to the project. They act as an agent, and they match investors to the project sponsors. For example, you might have heard of peer-to-peer platforms where they provide SME loans. They match the investors to the borrower's of the loan, and they take a cut in between and usually they are out of the picture.

But for us, real estate is an asset that requires a lot of management. So we do not think it's befitting to use the word crowdfunding as once you invest in an asset, you need to look after it over the investment period and dive. So there is a wider role on behalf of the platform. The platform has played a bigger role in this.

So, on the other side of it is the traditional fund management. Yes - we are close to the traditional formation side. But what is the difference? In traditional fund management after it has raised the funds, it is usually left to the discretion of the fund manager to decide how he wants to deploy the funds. Well, certain funds have certain mandates - clearly to invest in certain sectors.

But the discretion typically lies with the fund manager, and investors are intensely passive. They have little say on how the asset goes. So for us in co-investment projects, investors have full oversight of what they want to invest in, whether the deal itself fits their risk profile right and whether the investment period fits their investment horizon. So these are a few things that allow you to customise a co-investment concept and allows you to customise how you want your deal to be right.

Okay, next slide, please. Okay, now I pass it on to my partner Mao, he will touch on the crowdfunding industry or rather the co-investment industry.

09:27
Mao
So in short regarding the content outline, in this section, we will discuss the strong growth and the value proposition about co-investment platforms in other parts of the world. So through this growth, we see that several factors drive it and we will discuss these factors. We see that the greatest driver would be the value proposition that this investment class would bring the investors.

Next slide, please. So from Ernst & Young statistics and reporting on a market, the global crowdfunding platforms are forecasting about 84 billion USD and to reach 114 billion in 2021. So this is a compounded annual growth rate of 17%. Now, real estate co-investments is a specialised subset of the crowdfunding category. And it has recorded 18.5% compounded annual growth. The number of real estates co-investment platforms worldwide has also flourished over the years as seen in the graph here.

Next slide, please. So, let's get more colour into some of these as existing platforms in the States. Here we have some leading platforms; Cadre, CrowdStreet, Fundrise and RealtyMogul. Deals completed through their platform have grown to between 2 to 6 billion US dollars. Investor count, investor traction has also grown to approximately 200,000 for the larger platforms and 10s of thousands for other smaller ones.

Now, these companies have been around for four to six years and they have achieved a strong following within a brief span of time. This shows the acceptance of co-investment platforms by the investors. Also looking from the Investment Track Record (IRR), their track record has been north of 10% IRR. Next slide, please. So, there are several factors driving the growth rate and we see that investors are now more and more receptive in investing online.

So, regulators are also receptive in adopting regulations to innovation, this fuels industry growth. Through digital marketing channels such as LinkedIn and Facebook, digital platforms can also reach out and easily onboarding more users. Next, automated processes also lead to lower costs in serving investors. So this allows platforms to help a larger pool of investors with smaller check sizes at scale. This is as opposed to the traditional fund management where it serves a smaller number of institutional investors with larger check sizes. So these above are some structural drivers that drive the growth.

Next slide - but we find that this underserved segment is probably the growth that is most probably fuelled by real estate, co-investment platforms serving and bringing a pleasant value proposition to this underserved segment in the market. And we'll elaborate more of this in the next slides.

So, you know, you may ask yourself, what are choices out there for individual investors who want to invest in real estate and typically they get exposure through buying REITs from the open market, right? The other way is through direct investing. And what this means is, you know, most of the time is to buy an asset, usually a house or a condominium unit, right, usually in the residential segment we rent it out. Mostly we stick to local investments, but some investors may purchase assets overseas.

So personally, I have got investment properties for single-family homes in the United States myself, and we purchased them for rental income. Some of us may be more adventurous and buy as a unit trust into real estate. But typically there is a limited choice to investing in real estate. For institutional investors like sovereign funds, pension funds, insurance funds or family offices, ultra-high net worth, there's much deeper access and variety of real estate strategies and views that you can act on.

So for instance, here we go to invest in development projects, where the joint venture or partner with developers in developing residential apartments, townhouses, commercial buildings they can join. They can go into value-add deals so they go into lease-up opportunities or for example, redevelopment and property repositioning. Next, they can also go into debt opportunities, so commercial mortgage-backed securities mezzanine loans. And lastly, they get to invest in distressed deals and distressed assets. Now with the crisis, you know, this COVID situation comes opportunities. In this time you would get several distressed deals which institutional investors could access and invest into, but the individual investors could not.

Right. So then that brings us to, you know, for co-investments, co-investments could bring about these benefits and gives, you know, users access to these deals, which previously they could not get onto. Right? Typically, real estate co-investment platforms also screening these deals and after vetting through them, and be assured of the due merits or being assured or aware of the genuine risk, and you'll put up these respective platforms for investments by investors.

Now, there's one more point I want to make about this slide. So co-investing also brings more additional benefits, right? So it gives investors exposure across the rest of sectors, it gives investors exposure across investment strategies. So by right, it is like this. I mean data centres, logistics, commercial, commercial properties, residential and industrial zones, investment strategies, I mean, you know, buy a core value-add and opportunistic types of strategies for real estate. And it also gives exposure across geographical markets easily. Okay. Next slide.

So on the whole, it gives a level of unparalleled access right for the other for individual investors. Now this, what we're doing here now in the next few slides is to compare co-investing with direct and direct investing and with REITs. Now the table shows the comparison across multiple variables, right between co-investing and direct investing for this case, variables range from capital requirements diversification to management expertise. Now the assessment column on the far right shows the comparison and how co-investing stacks up regarding direct investing.

Now, I wouldn't run through all the variables. And I'll just highlight two pros and cons. So, as we earlier mentioned, co-investing uses greater access and a wider selection. Right. So it also gives us, you know, for compared to direct investing, the investment capital requirement is smaller. There are also diversification benefits. And this also works.

But last but not least, it gives us, you know, hassle-free user experience or hassle-free investment experience because there is little time and effort for the investor compared to direct investing on the cons, co-investing gives. So there is a lack of control, right, because it's not fully owned by the investor as opposed to direct investing. So you will give up some control there, liquidity wise there's a typical locking period for the deals done through co-investing.

Now moving on we compare co-investment with REITs.

Now, again, I'll list out some pros and cons pros. So risk wise co-investing is shielded from the stock market volatilities where an REIT is exposed, right? So the REIT prices fluctuate through the market, even though the underlying assets may not be fluctuating. And yet another pro is that the investor gets to select so there is a choice of an asset he gets to select the asset that he wishes to invest in for REIT, there's no such choice typically investors will buy into a pre-constructed portfolio.

If he invests in an REIT. For cons liquidity, right so co-investing has, again locking period, so it's less liquid compared to REITs whereas the for the investment quantum the co-investment takes a slightly larger investment quantum compared to the REITs for REITs you typically can go in at you know, a couple of thousand dollars but for co-investments typically 10,000 and up.

Next slide.

So, in summary, just listing on the value proposition that real estate co-investment platforms would bring the users right, we earlier covered greater access to better diversification and smaller quantum. Now, investors in real estate co-investment platforms also achieve higher investment returns compared to direct investing or compared to REITs. And this is through better access to real estate investment deals. Risk wise, it is also lower because of the diversification benefits it helps over helps the overall real estate portfolio risk.

Further, the investors can also leverage on the platforms you know a professional team in terms of deal sourcing in terms of asset management and so that provides a hassle-free ownership right.

So, let me recap for this entire section right. Essentially, there is a strong growth in real estate co-investment platforms and the USA is typically at the forefront of technology and traction for real estate co-investment. It is clear that attraction is strong, right? We also covered various factors about why this view has grown. And we highlighted the gap in the market and the value proposition to these investors.

Now, there is an evolution in the real estate investments industry, and we see this alternative way of real estate investment already starting to come to Asia for individual investors. Now in the next sequence of slides, Keith will then elaborate more on the factors you should consider when choosing an investment. Back to you.

19:31
Keith
Okay, thanks, Mao.

Can we jump to the next slide? Thanks. Okay. All right. I'll touch upon the factors to consider when you choose an online real estate platform. There are four parts to it. I will cover today. Next, like please, right? The first is the team, the processes, the investment structure and the level of transparency right

Next slide. Okay on the team itself, this is very fundamental when you choose an online platform simply put, the team has to possess the right skill set, the knowledge and experience these three things right. This includes market knowledge, financial know-how, quantitative skills, analytical skills. But when you choose an online platform and someone looking after your real estate, the team must have the transaction experience what we mean by this?

Someone who has invested in a deal manages the property successfully and divested it successfully as well throughout the entire investment period as well. Whole investment life-cycle is what we mean. Right? So, I have to say something about RealVantage.

Next slide, please. For us at RealVantage, we have a combined experience of a close to 100 years in real estate fund management, data science and technology on the real estate side we have transacted as a team we have transacted in over 10 billion real estate projects globally and across various sectors residential, office commercial, industrial and throughout our careers.

So we have taken on various fund management functions. For example, some of us are very strong in research, investment asset management and portfolio management, right? And many of us have come from esteem firms, such as GIC and ARA. Okay. Next slide.

The next section to highlight is the process and procedures. Simply put, the platform should have a system in place to identify the right deals and to manage the deals right. Next slide. Okay. So at RealVantage, this is how we do it, we have a very vigorous investment because investment process starts with research, where we identify the right markets, the right type of assets next, we embark on what we call detailed underwriting, which entails a fair bit of financial modelling, scenario analysis, sensitivity, sensitivity analysis before we go into due diligence now, due diligence is a whole new is a very important area to cover.

Due Diligence is really the four or five aspects to look after. It starts with the legal aspects and showing that your title is clean. Second, is to go into technical bits where you look at the property you want to know that it's structurally sound. The mechanical and electrical systems are working fine because all these have a material financial impact on your investment. So you need to know what you're getting yourself into.

Next thing, financials you have to go through the leases pour through the leases, ensure the taxes are clearly calculated and so on and so forth. Right.

Next is when we gained an asset after we have gained an asset, you'll put in place a detailed asset management strategy that sets up the yearly budget and the targets we need to hit. So what are these targets? The targets are really the numbers that were provided for our investors when they first invested in the deal. So that's the true north. Every year we know what we need to achieve to get to that number, right?

When we look at the deal, the important consideration overriding this is how are we going to make money off this right. The value creation part is a fundamental right, it has got to be crystal clear. Where is it coming up for the income so is the income secure? If the value in acquisition price are we buying above market, below market, at a discounted market are rents reasonable. Is there scope to add value means you could do some renovations and trying to add value to it or are we at the right time of the cycle, right time of the market cycle.

So all these things we asked ourselves before pulling the trigger, right? And at the back of it, a very important aspect also is looking at risks, you know, these are important points to note. We look at market risks, demand-supply, stuff like that. We look at credit risk of the tenant, how strong are the tenant interest rates risks? Where's it hitting up, down? So these are a few key risk factors, risk factors that we always look out for.

Next one is its on investment structure. This is fundamental to what you're investing in. You need to know where your money is going to and what you are owning. Right? So at RealVantage our management structures, it's clear cut, I just want to highlight two important considerations. One is, all our deals, like I said, are structured in the form of special purpose vehicles. Right?

So what it means is this, you come in into a shell company, there's nothing else in the company, you come in as a shareholder of the company. And that company owns only the real estate, nothing else, right. So what this means is you have a logical line of ownership. Right? This is important.

Second thing is, the funds that invested with us goes to a third party fund custodian. So their job is to manage the bank account and safeguard the funds on behalf of the investors, they will vet any withdrawals before funds go out so we don't have access to the funds. Right. Next one, level of transparency and accountability. This aspect it's a substantial challenge for fund managers, right?

But at RealVantage, we believe in full transparency and disclosure. So all our deals like you see we go to our platform layout, the investment structure, the risk factors, we do our cash flow modelling, we can look at our sensitivity right down to the single dollar. How we calculate how we think you will make money is there. Right? And also the fees we charge and be there now, every quarter we also provide you with an update on how your investment is tracking versus the initial projection. Now, sometimes delightful news is fantastic, sometimes bad news, right? It is not performing up to par or not performing well as what we have said we have to also fully disclose this.

Okay, so this is the last part of it. Let me conclude real estate, like I said, the whole concept of co-investing, it's a tried and proven concept. You do it at the institution level, informally at the retail level, but it's not structured properly. So that's where we come in and try to break some structure and access. Technological advancements, like my partner Mao has mentioned, has enabled investors to partake in this. Next one, key benefits Mao has mentioned about it, but just three points just to remember.

One is greater access to deals. Second, you come in with a smaller quantum. And third is the diversification benefits, right? Exponential growth as what you've heard, yes, as Mao mentioned. The US has caught on and grown now. It's coming right down to Asia, and we think it's a fantastic Alternative investment in real estate because you have well risk-adjusted returns. Okay, the key factors that I mentioned just a while ago are when you go about choosing a platform, experience, credentials, experience and so forth. Okay, excellent.

Now we have come to the end. We just pause a couple of seconds and we jump straight into the Q&A segment.

Transcribed by https://otter.ai

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Disclaimer: The information and/or documents contained in this article does not constitute financial advice and is meant for educational purposes. Please consult your financial advisor, accountant, and/or attorney before proceeding with any financial/real estate investments.