Institutional investors often seek exposure to real estate because it is expected to offer attractive long-term returns, for example: higher than bonds as well as a strong hedge against inflation. This asset class is regarded as an attractive component in a well-diversified investment portfolio, since it generally has a low covariance with the stock market.
Investors can choose from either direct property ownership, which normally require substantial internal management resources, or from indirect real estate exposure through shares in listed property companies or real estate funds. Since listed property companies have a high degree of covariance with the stock market in general, real estate funds have become a common investment option over the past ten years.
There are mainly two types of non-listed real estate funds: open-ended funds where shares can be issued and redeemed at any time; and closed-end funds (private equity real estate funds) where shares are not redeemable for cash or securities until the fund is liquidated. Typically, investors acquire an interest in a private equity real estate fund when the fund is launched and hold the interest until the fund is liquidated.