'In this market, you have one shot at launching a product'

For the uninitiated, the 18 months it took to launch the Trez Capital Private Real Estate Fund Trust (TPREF) might sound on the long side. But with no comparable product in the market to build on, slow and steady was the only way the firm could go.

“We didn't just create a product because we wanted to do it,” said Vikram Rajagopalan, Trez Capital’s senior vice president and head of Retail Markets. “TPREF was built on the back of investor feedback. And the reality was, we could not try to launch this unless it was as close to what the investors wanted as it could be.”

As Rajagopalan explained, Trez Capital has been at the forefront of Canada’s real estate investment space for nearly 25 years, and over the last decade focused its attention on high-growth U.S. markets characterized by strong GDP, employment growth, and business-friendly environments. Those trends have largely been supported by the gravitational pull of Fortune 500 companies setting up offices and business centres in areas such as Texas, Florida, and Arizona.

Because of those types of expansions, the areas where Trez Capital does business in are projected to account for more than two thirds of net projected U.S. population growth over the next five years. That translates into strong and growing demand for commercial real estate, specifically for-rent dwellings such as single-family homes, multiresidential apartments, and even self-storage.

“Our investors were telling us ‘We love what you’re doing on the development side, and we love the markets you’re in,’” Rajagopalan said. “But they tend to be in higher-minimum, closed-end structures where capital is called over time. So, our investors asked if we could create a vehicle that lets them get in at lower minimums, invest continuously like they would in any other fund, and the ability to hold the investment for sustainable long-term income.”

The best approach, the firm decided, was to design TPREF as a build-to-hold strategy that invests in building various types of rental projects – single-family residential, multi-residential, and self-storage properties, to name some examples – and staying invested for the long run. Given the exceedingly strong real estate prices over the past half-decade, the firm believes investors can get better long-term risk-adjusted returns by getting in at the ground-up level and holding over the long-term, as opposed to buying a pre-existing project that already comes with a large price tag.

But after that, they wrestled with more questions. In building a U.S. real estate fund with an open-ended structure, the firm had to determine how it would value properties on an ongoing basis, and how many consultants it would have to get involved in the process. With increased demand for governance and transparency within the alternative investment space, there also had to be measures in place to ensure adequate documentation and reporting on each deal.

“In this market, you pretty much have one shot at launching a product,” Rajagopalan said. “So we took our time, we understood the marketplace, and we worked extensively with our consultants. Judging by the interest we’ve seen in the fund, I think it’s obvious that we’ve hit home in terms of investor appetite.”

The appetite for the fund should come as no surprise to anyone who’s been following the economy and the markets. Last week, Statistics Canada reported a 4.7% headline inflation reading in October, an 18-year record; that’s on the heels of the U.S. announcing its own inflation reading of 6.2%, the highest since November 1990. Because of the historical correlation between rent and inflation, a dose of rental property exposure promises to provide investors a cushion against the impact of rising prices.

And while North American equities certainly have recovered impressively from their March 2020 lows, even the most bullish investors are likely to be mindful of where valuations are, as well as how volatile the broad markets have been. Because real estate has tended to be uncorrelated with the broad-based public market, the ability to diversify into high-growth areas of commercial real estate certainly bears considering.

While every investor and their mother might be eager to get some private real estate exposure, Rajagopalan stressed that no alternatives strategy is one-size-fits-all. Every investment decision, he stressed, has to be approached with an eye on suitability, which means understanding the nuances of the specific investment product being offered.

“Beyond the investment thesis, the biggest risks in alternative asset classes are managerial and operational – who the manager is, their track record, their governance structure, and how their fund works,” he said.

The other piece of the suitability puzzle, the know-your-client aspect, underscores the importance of having professional advisors. As traditional financial products become increasingly commoditized, advisors who have incorporate alternatives into their portfolio management toolbelt will be able to demonstrate more value. But just as important, Rajagopalan said, is their ability to understand and prescribe the right solution for the right situation and the right client need.

“We’re here to support advisors in any way, shape, or form in terms of providing transparency and reports,” he said. “We believe in the need for alternatives in their clients’ portfolios, and we believe that they're the best judge of that need and how alternatives can help support investors’ long-term goals and aspirations.”