The guide for an investor in real estate funds overseas

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These are no longer estimates: in recent months there has been a significant decrease in the volume of real estate investments in Israel. In December, the number of investment transactions was 3% lower than in the corresponding month last year, and in 2022 as a whole, the number of transactions in the field was 48% lower than in 2021.

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Between direct investment and investment in a real estate fund

According to Attorney Spector, “direct investment simply means going and buying rights in real estate – ownership rights or a long-term lease – and becoming the sole owner of that property. You get full control over him to decide to whom to rent, when to rent, whether to renovate, destroy, etc. The main advantage inherent in this method is reflected in the control that one has over the property, including its liquidation (sale/encumbrance – GL) at every stage. On the downside, we can mention the relatively large amount of work that such an investment requires, including conducting market research, operations, knowing the legal and tax aspects, and more.

Adv. Ram Spector

personal: 39 years old, married + 1, lives in Tel Aviv
professional: Tadmor Levy is a partner in the Arnon firm and jointly leads the firm’s investment fund practice
Something else: Lover of rock music

“At the same time, you can invest through real estate funds or other dedicated investment corporations. These entities offer the investor the convenience of investing money in a corporation that takes care of locating the assets, managing assets on an ongoing basis, handling all issues of financing and ongoing maintenance. In accordance with the internal conditions of that investment corporation, he also takes care of liquidating the asset when the time comes. Therefore, there is great convenience in this channel.

“Another advantage is reflected in the diversification of the investments of those funds, so that it reduces the chance if something goes wrong with a single asset. On the downside, we can mention the costs: we will pay the managing body, so it is important to check the management fees. Another thing that needs to be taken into account is that investments in such funds are Mostly not liquidity. You lock or engage your money for long periods.”

According to Spector, the investment in a real estate fund does not grant direct ownership of a real estate property, but the investor receives “indirect ownership by virtue of being associated with a corporation that owns a chain of properties or several properties.”

According to him, the investment in real estate funds can be viewed as a financial instrument, but the value of the activity “is not derived from the value of a security in the market and the behavior of other investors who influence it.” One way or another, he recommends checking and evaluating the management capabilities and reputation of fund managers, as part of Essential in deciding whether to invest with them.

A solid channel that requires personal inspection | Eric Mirovsky, Commentary

Real estate investment funds offer a different type of real estate investment. If we usually talk about direct ownership of an asset, here we are talking about a partnership in the fund that makes the investments, and we have no contact with the assets themselves.

I know quite a few investors who want complete control over the property, and here they don’t have it. This is a fundamental thing.

Attorney Ram Spector points out in the interview the importance of the tests – before you join such a fund, you have to do very thorough and expensive tests regarding the managers, the policy, where it invests and in what, what its performance is from the previous years.

It should be remembered that for reasons of maintaining the privacy of investors in the fund, each investor does not know the other investors. In the past, there were rather sad cases where people filed claims against the fund individually, because they only got to know each other at a later stage. You may need a device that will allow people to get to know each other in times of crisis. But it is a device that needs to go through some kind of series in my opinion, because it is not easy to do: a crisis is a matter of definition, and the privacy of the investors must be preserved.

Another matter is the matter of the trustee in the group. We see from the field of purchasing groups that the lawyers who claimed to represent all the members, were actually acting on behalf of a group organizer. Of course, a trustee works for the management, and it is not certain that he will represent you as an investor if you have something against the management. This is an issue that needs to be taken into account.

Bottom line, we’ve already talked about the issue of timing before. This is probably not the best time to invest in Israel and investors should think carefully about whether they invest in real estate in Israel, or abroad, or move to other avenues. The funds are a solid channel, but you need to check quite a few things related to them before entering into an investment.

“The mechanism of the distribution of profits within investment funds works in the form of a distribution waterfall. The profits that come in from the activity are distributed either periodically or at the end of the period, when we realize the assets,” explains Spector. “Imagine a tower of champagne glasses that you start filling from the top. Only when you fill the top glass completely, then we pour into the next level. What does this mean? There is an order for the distribution of funds within the fund. The first funds are going to return the initial investment of the investors, And they are distributed exclusively to the investors. This is actually the return of their capital contribution up to 100%. The next stage will be a preferential return. This is the creaming of the investors and the distribution of their profits. Only in the third stage do the fund managers themselves see the money.”

Tests are required before the commercial contract

When we come to invest in a real estate fund, we should pay attention to several issues, as Attorney Spector clarifies. “First of all, you should check how much to invest. Is there a minimum investment that I need to bring from home. After that, you will find out what the life of the fund is, since it is an illiquid investment and over a rather short period of time.

“In addition to that, we need to understand what the fund’s investment strategy is and what its investment mandate is. For example, we want to understand if the fund invests in yielding real estate, if it focuses on residential real estate or if there is some mix.” To our question as to whether we will know in advance which assets the funds are investing in, Spector explains that smaller funds will present investors with assets they have already located, and large funds – which also generally address very large investors – will only present an investment strategy and investment areas.

Another check that Spector suggests checking before the contract concerns the expenses that the fund bears. “It is very important for us to see that the fund is not inflated in terms of its expenses, and that the funds only go to things we would like and not to activities we would not want to finance,” he says.

“An investor must understand the structure of the fund’s holdings. Are there any related corporations and if so how,” says Spector. He suggests using professionals because even though such a test may be expensive and reach tens of thousands of shekels, it may give us a lot of peace of mind.

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