Editor's Letter: What is real

Like you, we see evidence of growing optimism across the market, much of which is evident in our coverage this month. PERE magazine September 2010 issue

If you read PERE, it is a safe bet that you’re already an optimist about the future of property investment, because you are seeking out ideas, connections and people who will help you realise further success with your real estate investment programme. A pessimist wouldn’t bother “sharpening the saw”.

Like you, we see evidence of growing optimism across the market, much of which is evident in our coverage this month.

For starters, you will find interesting our investigation into TPG’s recently created real estate platform. That one of the largest private equity firms in the world would dedicate a portion of its significant resources and capital to a property play shows yet another group of highly intelligent investors being attracted by the risk/return profile of this asset class.

To be sure TPG isn’t the first buyout firm to charge into real estate. Two of the biggest investment platforms in the world – Blackstone and Carlyle – started life as buyout firms but went on to great success in the property assetclass.

Until recently, TPG sat out this franchise diversification, focusing instead on creating strategies for Asia, growth equity, financial services and hedge funds. Now, as Robin Marriott details, the company led by David Bonderman will divert capital originally meant for private equity into an ambitious real estate programme.

News of a yet another private equity firm seeing fit to enter real estate brings into focus a much broader issue with which institutional investors have been struggling – what is real estate and how should it perform? To those sceptics who say TPG sees real estate as a convenient way to deploy its mega-billions, the firm might respond that in fact the development and management of property is a business, not merely a collection of hard assets. People who invest smartly in real estate, TPG would say, view and vet these assets as operating businesses.

That such a business is placed in a portfolio alongside many other businesses more typically targeted by private equity firms says something about TPG’s return expectations for property-related investments (or perhaps about its diminished expectations for the other non-property businesses). If property belongs in TPG’s private equity portfolio, where does it belong in the portfolio of the institutional investor?

With “hard assets”? With equities? In a bucket of its own? These are questions that will be answered over the next critical phase of the real estate market’s development, which PERE will be closely chronicling.