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Understanding the Return Profiles of Real Estate Investment Vehicles

Working paper #455
Peter Linneman and Deborah C. Moy

Opportunistic real estate private equity funds target gross returns of 16 percent to 20 percent by pursuing unique and aggressive value-added investment strategies. As a result, benchmarking performance for these vehicles is difficult. This article simulates four types of real estate investment vehicles (NCREIF, core plus, NAREIT, and opportunity funds) under various market conditions. At almost no point during comparable investment horizons does the return profile for the opportunity fund resemble that of the other three investment vehicles, regardless of whether market conditions are “normal,” “strong,” “weak,” or “disastrous.” However, relative return patterns are shown to change under different market conditions, and each vehicle is susceptible to particular risk factors in varying degrees. So, while there is currently no quick solution to benchmarking the performance of real estate opportunity funds, this analysis attempts to dissect the relative weight of each risk factor affecting the returns of each vehicle.

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