Fidelity Core Real Estate Fund

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QBoy
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Joined: Sun May 05, 2013 7:09 am

Fidelity Core Real Estate Fund

Post by QBoy »

I got an email from Fidelity about a new private vehicle for real estate investing:

https://www.fidelity.com/go/alternative ... eal-estate

What are the advantages of such an investment compared with publicly traded REITs or a REIT index fund, like VNQ?

Lack of liquidity is clear disadvantage, but I was wondering if there are compensating advantages.
GPassik
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Re: Fidelity Core Real Estate Fund

Post by GPassik »

While not exactly the most common thinking on this site, I think this is a solid investment choice. First, well managed, private real estate has done very well historically. Star fund managers, such as Blackstone and Starwood's Real Estate funds have demonstrated stellar performance since their launches a few years back. This fund offering is not necessarily to outcompete these (although on price, they come in lower than both of the above mentioned funds) but rather to be able to offer their HNW clients alternatives that other firms do. Fidelity has stood out over other firms for their straightforward advisory / fiduciary offerings, however where alternatives are concerned, Fidelity has struggled with this in recent years. I see this as a defensive move and not necessarily a big money maker for them, however given Fidelity's lack of offerings like this previously, I suspect many of their HNW clients will like this product and I anticipate it will perform well. Relating to illiquidity. That's the cost of doing business for these products. Basically, they buy real estate, if every dip in home values causes huge investor redemptions, they would be forced to sell property at a less ideal time. Ultimately, these should be viewed as an income play. Monthly consistent income based on tenant rents without the hassle of having to fix a dishwasher at 2am. Compared to their public cousins, the income is usually a tad higher because of leverage. However they're much less volatile. Yes, this last point is debatable, because in theory real estate prices should impact the value of publicly traded REITS, long term, but realistically the market will be a huge factor on what they think they are worth etc. at any given time.
Tramper Al
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Re: Fidelity Core Real Estate Fund

Post by Tramper Al »

Feels like a hard no, and I'll stick to my current liquid and accessible real estate vehicles.
GPassik
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Re: Fidelity Core Real Estate Fund

Post by GPassik »

I wouldn't say it should be a hard no. Private Real Estate performs differently than public REITS. There are pluses and minuses. For example, the lack of liquidity allows private funds to be more flexible with their investments. Further, the private ones I mentioned in my initial post have significantly outperformed their publicly traded cousins. Also, public real estate is extremely volatile while private real estate is not (of course this is somewhat artificial as private funds are typically priced monthly). Usually, the yields on Private REITS are higher, too.
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Sage16
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Re: Fidelity Core Real Estate Fund

Post by Sage16 »

I took a quick look at it a couple months back when I first saw it. We have enough of our net worth in private RE LLC's, at least at the moment, so I decided to pass. What I like and don't like about it is that you get a 1099 for taxes. That makes doing your taxes easier but you lose out on the benefits (and added complexity) of K-1's that pass down tax loses like depreciation. You give up liquidity vs a REIT or index fund of REITs and not sure how you compare performance to them. I may revisit the fund in the future.
Bogle on investing: Diversify, focus on low costs, invest for the long term. Don't speculate and don't be distracted by volatility.
BJJ_GUY
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Re: Fidelity Core Real Estate Fund

Post by BJJ_GUY »

GPassik wrote: Wed Mar 01, 2023 12:22 pm I wouldn't say it should be a hard no. Private Real Estate performs differently than public REITS. There are pluses and minuses. For example, the lack of liquidity allows private funds to be more flexible with their investments. Further, the private ones I mentioned in my initial post have significantly outperformed their publicly traded cousins. Also, public real estate is extremely volatile while private real estate is not (of course this is somewhat artificial as private funds are typically priced monthly). Usually, the yields on Private REITS are higher, too.
If comparing apples to apples, there shouldn't be much fundamental difference in performance over longer time periods. Public REITs obviously present equity market influence, and higher volatility (of short-term prices, but not of the value of the holdings), whereas Private funds use back-ward looking appraisals to value the fund, which has a smoothing effect.

I don't follow your point about lack of liquidity allowing private funds more flexibility. Public REITs don't have any investor redemptions, so as it relates to any liquidity related benefits, it seems it would be the public vehicles.

Comparing the equity REIT index against the private real estate benchmarks, the performance over time is pretty similar, and I believe public REITs slightly outperforming, but marginally. Albeit, the volatility challenge for publics makes them less compelling, potentially, so it just depends on how long-term performance is understood and/or interpreted.

To me, both structures can make sense. The relative valuations between private and public real estate portfolios can get materially dislocated. These are the times the smart decision is selling over-priced and moving to the assets available at discount.
Grt2bOutdoors
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Re: Fidelity Core Real Estate Fund

Post by Grt2bOutdoors »

It’s a costly fund. I’d rather buy a Reit index. Commercial real estate is going into a bear market, delinquencies are rising, rental prices are falling and a lot of valuations are stretched. You’d have to read the details but an opportunistic approach in the investment strategy would be preferable than being fully invested from the onset. A 3 year lock-up seems low, typical pe funds have longer lock-ups. The low 5% hurdle rate seems low - before performance fees are assessed.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
Valuethinker
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Re: Fidelity Core Real Estate Fund

Post by Valuethinker »

Grt2bOutdoors wrote: Thu Mar 02, 2023 3:13 am It’s a costly fund. I’d rather buy a Reit index. Commercial real estate is going into a bear market, delinquencies are rising, rental prices are falling and a lot of valuations are stretched. You’d have to read the details but an opportunistic approach in the investment strategy would be preferable than being fully invested from the onset. A 3 year lock-up seems low, typical pe funds have longer lock-ups. The low 5% hurdle rate seems low - before performance fees are assessed.
Blacskstone froze redemptions from its fund.

Liquidity bites just when you do not want it to with these things. I agree Opportunity Funds are the way to go at this stage in the cycle, if you need to be in the asset class at all.

If the underlying asset is illiquid, you really want a proper Closed End Fund, and that's basically a REIT. An open ended situation cannot deal with the waves of selling pressure it will get when there are market downturns.

Agree that the whole future of commercial real estate is in turmoil. On rental apartment side you have moves towards more tenants' rights. Offices it's really hard to say post Covid-- double digit vacancies in SF, NYC & (nearly) in London - just look at the Tube (subway) on a Monday or Friday AM.

Retail distribution has obviously been a super hot sector, but it can't continue at Covid growth rates (unless we have more epidemics).
BJJ_GUY
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Re: Fidelity Core Real Estate Fund

Post by BJJ_GUY »

Valuethinker wrote: Thu Mar 02, 2023 7:27 am
If the underlying asset is illiquid, you really want a proper Closed End Fund, and that's basically a REIT. An open ended situation cannot deal with the waves of selling pressure it will get when there are market downturns.

Agree that the whole future of commercial real estate is in turmoil. On rental apartment side you have moves towards more tenants' rights. Offices it's really hard to say post Covid-- double digit vacancies in SF, NYC & (nearly) in London - just look at the Tube (subway) on a Monday or Friday AM.

Retail distribution has obviously been a super hot sector, but it can't continue at Covid growth rates (unless we have more epidemics).
I agree that a proper closed-end structure would be preferable. Open-ended funds investing in illiquid assets always has the potential -- and I'd say likelihood - for cynical fund flows to adversely impact the returns of long-term investors in the fund. When the fund is performing well, new investors come in and dilute the legacy portfolio. On the flip side, when markets are challenged, redemptions come in large waves which can lead to a less than ideal portfolio if the fund manager liquidates assets to raise cash, because often times when redemptions are forced they sell holdings with broad demand.
BJJ_GUY
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Re: Fidelity Core Real Estate Fund

Post by BJJ_GUY »

Grt2bOutdoors wrote: Thu Mar 02, 2023 3:13 am It’s a costly fund. I’d rather buy a Reit index. Commercial real estate is going into a bear market, delinquencies are rising, rental prices are falling and a lot of valuations are stretched. You’d have to read the details but an opportunistic approach in the investment strategy would be preferable than being fully invested from the onset. A 3 year lock-up seems low, typical pe funds have longer lock-ups. The low 5% hurdle rate seems low - before performance fees are assessed.
The 5% hurdle is low because this is an open-ended fund. I'm not an expert on these type of vehicles, but I'm going to guess that the 5% is used to crystalize their performance fees on a calendar year basis. So it truly does act like a hard hurdle, and not like a preferred return (over the life of the fund).

And yes, that 3 year lock-up seemed short to me at first too. Once I realized the fund structure it made more sense. They will tender the 5% quarterly... but only if it's convenient and doable. That 3 year hard lock period just keeps investors from bugging the manager for 36 months, but it certainly doesn't mean you are contractually obligated to anything after that aside from the fact that you can let it be known you want to tender your shares (and hope the manager can provide some liquidity for you)
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