With approximately $1.7 trillion in assets under management, Newport Beach, CA. India-based investment management firm PMCO has launched a new real estate gap fund. The fund could signal a further “democratization” of commercial real estate investment opportunities, industry analysts say.
Announced earlier this month, the PIMCO Flexible Real Estate Income Fund (REFLX) will begin with a $75 million seed capital commitment from the firm and launch PIMCO’s $190 billion commercial real estate platform.
The fund invests in four main buckets in the commercial real estate industry: privately owned income-producing commercial properties; Personal real estate loans; Public debt such as mortgage-backed securities; and public equities such as REITs. PIMCO plans to focus on opportunities involving high quality and stable assets with the vehicle.
“This year’s extraordinary asset prices in the financial markets have created what we believe are the most attractive investment opportunities in more than a decade,” PIMCO Managing Director and Group Investment Officer Dan Evacin said in a statement. They create an attractive scenario for patient investors who are ready to deploy funds in a flexible vehicle to allocate investments.
A gap fund is a type of closed-end mutual fund that does not trade on public exchanges. Although these funds can offer high returns to investors, they are considered illegal as investors can buy or sell stocks at certain times of the year. REFLX currently expects investors to be able to repurchase 5 percent of outstanding shares each quarter, PIMCO said in a statement announcing the fund.
PIMCO has other investment vehicles targeting the commercial real estate space, but those vehicles are mostly aimed at institutional players. REFLX, on the other hand, is designed for individual investors to own commercial real estate, the firm said, adding that the ability to invest in real estate equity and debt—in the public and private markets—can offer investors greater flexibility.
“When liquidity is needed, this money provides the benefit of exiting public stocks,” said Milind Meher, founder and CEO of YieldStreet. “So this, in my opinion, gives the fund managers more flexibility to manage the money properly.”
Traditionally, the main way for individual investors to get into the commercial real estate space is through equity and mortgage REITs. REITs offer the tax advantage of paying out almost all of their profits to shareholders as dividends, and REITs are often bought on the public stock markets.
PIMCO’s REFLX fund has elected to be taxed as a REIT, which means it can take advantage of certain tax benefits, which ultimately means the fund should have a tax-efficient distribution profile, writes Allianz Real Estate CEO Chris Donner. About the fund’s strategy document. Allianz Real Estate is partnering with PIMCO, owned by Allianz SE, to manage the fund.
PIMCO funds such as Apollo Diversified Real Estate Fund, which target public and private real estate equity and debt, are restaurateur funds. 5.9 trillion in net assets as of June 30, 2022 and Class I shares returned 13.83 percent at the end of the third quarter.
BlueRock Total Income+ Real Estate Fund A stock returned 24.67% over the same period. In September, the company announced that it had surpassed $7 billion in net assets — making it the first real estate gap fund to hit the mark.
As public stocks continue to see volatility—as inflation begins to slow—these alternative funds will continue to grow, even as the pandemic slows entry into real estate gap funds.
“I think there will be other funds that will continue to investigate this,” he says. “Private markets are becoming increasingly democratized. [The] The world’s largest institutional investors have access to private markets, but they sell at retail [investors] do not. I think we will see more vehicles coming into service in the next decade.