Real estate investment funds in Chile have become a tool to democratize real estate investments. democratize investments in the real estate sector. These vehicles allow individuals and legal entities to participate in real estate projects that would otherwise be unattainable due to the fact that it is a very capital intensive industry. Since its introduction, this asset class has experienced remarkable growth in the country, reaching assets of 167.3 million UF as of March 2024.

However, many investors are unfamiliar with these investment products, their benefits and new emerging trends, However, many investors are not familiar with these investment products, their benefits and the new emerging trends in the domestic capital market. in the domestic capital market.

Life cycle of a real estate fund

In order to invest in real estate investment funds, it is necessary to research and understand their functions. To do so, it is key to know about their life cycle, which covers from their creation to their liquidation and generally considers five stages: 

1. Formation. The strategy and structure of the fund is defined.
2. Capital raising. Involves raising investment and establishing procedures.
3. Investment period. This is the period in which investments are made and managed.
4. Divestment. Consists of the sale of assets and capital distributions.
5. Liquidation. Marks the closing of the fund, with the final sale of assets and distribution of income to investors.

Types of real estate funds

The Chilean Association of Investment Fund Administrators (ACAFI) classifies real estate funds into three subcategories:

1. Rental Real Estate Investment Funds. These are funds that invest in real estate for lease, whether residential, commercial, offices or warehouses. They represent 66% of the assets under management of the universe of real estate funds.
2. Real Estate Development Investment Funds. These funds are oriented to the construction and development of real estate projects for subsequent sale. Although they have shown dynamism, their growth has slowed down due to high construction costs and high interest rates. They represent around 14% of real estate funds' assets.
3. Mixed Real Estate Investment Funds. These funds combine investments in income and development. They represent 20% of the total assets of real estate funds, with a growth of 4.3% in the first quarter of 2024.

Strategies and new trends: From Core a Value Add

Investment strategies in real estate funds vary according to the level of risk and expected return. vary according to the level of risk and expected return. Some of the main ones are:

• Core. Focused on high quality properties with stable income and low risk. Investors seek properties with long-term leases and low management requirements.
• Core-Plus. It offers a low to moderate risk profile, with high quality properties that require slight improvements.
• Value Add. Seeks to increase the value of assets through operational or structural improvements. Although in Chile the preference continues to be for strategies Core o Core Plusthe approach Value Add is gaining ground, especially in markets with high soil consolidation.
  • Industrial Context. The e-commerce has driven changes in the requirements for logistics and warehousing centers, raising the demand for this type of real estate. Despite the limited supply and high vacancy in older properties, the Value Add strategy presents an opportunity to upgrade and update existing industrial assets.
  • Office Context. Changes in the way people work have affected the demand for office space. Preference has shifted towards buildings with high standards of sustainability and wellbeing. Developers face challenges in acquiring land and permits, which is why the Value Add strategy can be key to revitalizing existing buildings and adapting them to new market demands.

The real estate fund landscape in Chile is dynamic and constantly evolving. Understanding the value this industry brings and keeping up to date with new trends is essential to take advantage of investment opportunities in an ever-changing economic environment. in an ever-changing economic environment.

Marco Aurelio Arellano
Real Estate Analyst AGF