Not everyone may be aware of this, but direct property investors can range from large institutions and professional property investment companies to private capital investors, as well as retail investors.
Lured by the high potential returns, there has been a dramatic increase in direct property investment activity over the past two decades, supported by strong risk-adjusted returns and stable income.
Forms of direct property investment
- Direct purchase
The commonest type of direct property investment is simply the act of directly purchasing a property. Investors who directly purchase a property would include owner-occupiers of residential properties who have full ownership of the property.
- Property syndication
Property syndication is a form of direct property investment where a real estate investor with limited capital, pools his or her capital together with other investors to acquire properties that they would otherwise not be able to afford.
Property syndicates usually have a limited lifespan, depending on its terms and the objectives of investors. For non-development syndicates, investors will make an initial contribution to the pool of capital, and in return, receive distribution income during the lifetime of the syndicate, which ranges from five to 10 years. Upon the termination of a property syndicate, investors will also receive a capital return.
In general, property syndicates are not open to accept public investment monies, after the fund is established. They also tend to have closed-ended terms, such as restrictions on the number of investors and a minimum set amount of capital to be raised.
- Real estate limited partnership
Another way to directly invest in properties is via a real estate limited partnership (“RELP”). Similar to property syndication, a RELP is formed by a group of investors pooling their capital together to invest in property assets. Under its limited partnership status, RELPs would have a general partner who manages the investment and assumes full liability, while other limited partners who are simply passive investors are liable only up to their investment amounts.
RELPs typically form when an experienced property manager secures a property deal but lacks funding, and chooses to partner with outside investors who may not have the management experience or do not want to be passive investors. A RELP follows a finite business plan to purchase or develop properties, and after all holdings are disposed of, the partnership will dissolve.
Direct property investments are usually long-term illiquid investments. However, they are a stable and secure alternative asset, compared to the publicly listed shares, which can be highly volatile.
As with other forms of investment, before venturing into the real estate market, investors should decide on an appropriate investment strategy that matches their risk appetite. For more insights into direct property investing, check out RealVantage’s guide on the “Six Critical Success Factors in Direct Property Investment”.