Why not put $100M into a REIT instead of buying a building?
I'm confused. Do REPE firms, or even other REITs do this? Do large investors even buy shares in REITs? Do large investors buy ETFs?
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Control, sizeable tax benefits, etc.
Because you'd be a speculator, not an owner.
Picking stocks is a very different business than developing and/or operating a building.
This. There is a fairly sizable institutional secondary market, but it's not the same thing.
Same reason why people don't just invest in stocks opposed to starting their own business.
REIT's are companies that own real estate, you are investing in the company, not the real estate. You may get your dividend but that's it.
Plus lack of control, etc.
Private equity companies, most notably Blackstone, have bought entire reits before. Usually to delist them and sell/reposition some assets. Partial stakes would serve little purpose it would seem although for example Blackstone is in the process of listing a reit in india in which it would retain a partial stake.
On the other hand, hedge funds use etfs pretty regularly as an isolation mechanism. If you look at the holdings of people like elliott they usually have a pretty substantial short etf/index position. You might even go short a reit basket under some long short real estate strategy.
Edit : read question backwards
I think the better question is, "Why not put $100M into a REIT instead of putting $100M into a REPE fund?" That is a reasonable question because, net of fees, (at least as of 2016) REITs tend to outperform REPE funds.
As others have mentioned, using your own money (or your own money and friends, family, and close colleague's money) provides control, tax benefits, and allows for you to take advantage of specific market knowledge. It's an entirely different investment class.
With respect to the REIT/REPE comparison, curious if you're only comparing like-for-like investments, or the firm performance as a whole. For example, when you say net of fees, are you saying that both the REIT and REPE managed accounts perform the same, or are you saying that REITs outperform internally managed REPE funds as well? Just curious.
I can't recall if REITs outperform PE funds before fees as well, but the info I was given showed REITs outperformed REPE funds net of fees.
Regardless, that's the actual comparison one needs to make if considering the question of how to passively invest. Direct ownership of real estate, even if delegated to a general partner, tends to require greater aforethought and ongoing decision making (with regard to major decisions), and, in my view, is not comparable to investing in REPE or REITs.
Btw, if you have $100MM please do not invest directly--I will gladly let you invest in my new vehicle (create for you) or run a separate account for you. PM when you got the stacks.
Leverage. $100MM = $400MM in buying power. You can buy buildings with borrowed money and not be subject to margin calls...
Does a typical REIT have access to leverage too? I would think that even with leverage and net of interest fees, the average IRR% on the purchase of a building will be similar to the average total yield of REIT?
I know an acquisitions director for a huge REIT here in SoCal. They, as of two years ago had a $3bil credit facility. Not sure what they do after the acquisition, but going in I'm sure they just cut a check from the LOC.
This is the answer. The debt ratio of the NAREIT index is 41.9% right now. That means that for an average property acquisition, REITs are putting up ~60% of the purchase price in equity, ~40% in debt. in most of their ownership. Compare that to PE real estate, where deals are closer to 20% equity, 80% debt.
Of course, there are costs to debt, but they aren't very high right now.
Further, to your question about why institutions would invest in a building vs. own REITs - the income stream from owning property is very, very stable, while the dividends and share value of a REIT can be very volatile. The value of your ownership stake in a building doesn't change every day, doesn't move with equity market cycles, doesn't have to be marked to market all the time, and just keeps paying current income. All this is very attractive to institutions who have more than enough liquid security holdings.
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