The Importance of Governance in Private Real Estate Investments

Credits: Look closely at governance when assessing private assets

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Ensuring Capital Protection and Sustainable Returns

In the ever-evolving landscape of real estate investments, private Real Estate Investment Trusts (REITs) have emerged as an attractive option for investors seeking diversification, tax efficiency, and the potential for higher returns. However, as these investments operate with less stringent oversight compared to their public counterparts, the quality of governance within a private REIT becomes paramount.

Governance, often taken for granted in the realm of publicly listed securities, plays a crucial role in safeguarding investor interests and ensuring the long-term sustainability of a private REIT. Geoff Lang, Senior Vice President of Business Development at Equiton, a private equity real estate firm, emphasizes the significance of assessing a private REIT's governance structure, especially when it comes to protecting capital.

"Corporate governance can make the difference in moments like that, protecting a company and ensuring its investors' interests and capital are preserved as best as possible," Lang explains.

Unlike public REITs, which are subject to stringent disclosure obligations and daily pricing, private REITs operate under prospectus exemptions, potentially leading to concerns about transparency. However, the returns and diversification they offer make them a broadly attractive asset class, provided investors choose the right private REIT.

So, how can advisors and investors evaluate the quality of governance within a private REIT? Lang suggests several key factors to consider:

1. Independent Board of Directors: A majority independent board can provide valuable perspectives and experiences, helping senior management make informed decisions that prioritize investor interests.
2. Audited Financial Statements: Transparent publication of audited financial statements is crucial, as it demonstrates a commitment to accountability and allows for a thorough evaluation of the firm's financial health.
3. Third-Party Assessments: Voluntary participation in external assessments, such as the Global Real Estate Sustainability Benchmark (GRESB) or Environmental, Social, and Governance (ESG) evaluations, showcases a dedication to sustainable and ethical business practices.
4. Management Experience: The experience and track record of senior management should be carefully examined, as seasoned leaders with a deep understanding of the industry can navigate challenges more effectively.
5. Accessibility and Responsiveness: Strong governance is characterized by a firm's willingness to engage with investors and advisors, promptly address queries, and provide comprehensive information.

By prioritizing these factors, private REITs like Equiton can foster an environment of trust and transparency, which Lang believes is essential for generating consistent long-term returns and mitigating downside risks.

"Our senior leaders had the foresight to mandate 10-year fixed mortgages," Lang notes. "This approach safeguards against volatility and high-interest rate environments."

As advisors and investors navigate the private real estate market, considering governance should be a top priority. A well-governed private REIT not only offers the potential for attractive returns but also provides a crucial layer of protection for investors' capital, ensuring sustainable growth and long-term success.

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