At FivePearls, we believe great investment decisions are as much about the structure of the investment as they are about the location. This article reflects our opinion on how property funds across a variety of structures can be used to access the growth of the world’s most dynamic cities. It is not financial advice and should not be treated as such.
1. Capital Cities as Long-Term Economic Engines
Cities like London, Sydney, New York, Seoul, Singapore, Toronto, Paris, and Tokyo share a rare combination of economic clout, global connectivity, and real estate scarcity. They set property value benchmarks for their countries and act as magnets for capital.
Even during periods of economic turbulence, these markets tend to recover faster due to:
- High population density and continual demand.
- Limited developable land and strict planning controls.
- Status as global business, finance, and cultural hubs.
- Deep liquidity and institutional investor participation.
For private investors, the challenge is gaining exposure to these markets without having to buy and manage property directly, which is why more are gravitating toward property funds as a strategic entry point.
2. The Broad Spectrum of Property Fund Structures
When we talk about “property funds,” we’re really talking about a spectrum of structures, each with its own return profile, risk level, and investor protections. Some of the most relevant include:
- Preferred Equity Funds
- Investors have priority over ordinary equity holders in profit distribution.
- Returns may be fixed or variable, often backed by project cash flows.
- Positioned between senior debt and common equity in the capital stack.
- Wholesale Debt Funds
- Lend capital directly to property developers or asset owners.
- Often secured by real estate with a registered mortgage.
- Income generally fixed and contractually agreed.
- First Mortgage Funds
- Provide loans secured by a first registered mortgage over a property.
- Highest priority in repayment order if the borrower defaults.
- Typically, lower-risk, lower-return compared to mezzanine or equity positions.
- Mezzanine Debt Funds
- Sit between senior debt and equity in the capital stack.
- Higher risk than first mortgage lending but potentially higher returns.
- May include equity conversion rights in certain cases.
- REITs (Real Estate Investment Trusts)
- Tradeable on stock exchanges, offering liquidity.
- Own and operate income-producing property portfolios.
- Distribute a high percentage of income to investors.
- Development Funds
- Focus on acquiring land, gaining approvals, and constructing projects.
- Returns can be higher but depend heavily on project completion and sales.
- Hybrid Funds
- Combine multiple strategies (e.g., first mortgage lending plus preferred equity stakes).
- Designed to diversify risk within a single fund.
3. Why Structure Is as Important as the Asset
The location of an investment determines what you’re investing in.
The structure determines how you participate in the returns and when you get paid.
Key considerations include:
- Risk Priority: Where your investment sits in the capital stack; senior debt, mezzanine, preferred equity, or common equity determines your repayment priority.
- Income Predictability: Debt-based structures often provide fixed, contractual returns, while equity-based structures depend on project or market performance.
- Security: Some structures offer registered mortgages over assets; others rely on project cash flows or profit share agreements.
- Liquidity: REITs can be traded on an exchange, whereas closed-end development funds may require you to hold until project completion.
- Control: Certain structures allow more influence over asset management decisions; others are entirely hands-off.
In premium markets like Sydney, London, and New York, where land is scarce, projects are large, and capital requirements are high, choosing the right fund structure can significantly influence your outcomes.
4. Debt Philosophies and Their Relevance to Funds
Well-known thinkers have long debated the role of debt in wealth-building:
- Robert Kiyosaki (author of Rich Dad Poor Dad, bestselling personal finance book series): Advocates using “good debt” to acquire income-producing assets.
- Dave Ramsey (The Dave Ramsey Show, bestselling author of The Total Money Makeover): Recommends eliminating debt before investing aggressively.
- Suze Orman (The Suze Orman Show, bestselling author of The 9 Steps to Financial Freedom): Emphasises liquidity and avoiding overextension.
- Peter Schiff (author Crash Proof, CEO of Euro Pacific Capital, economic commentator): Champions tangible assets like property as protection against inflation and currency risk.
The takeaway? Debt, when structured correctly and matched to your risk profile, can be a powerful wealth-building tool, especially in property funds where asset-backed security is part of the equation.
In our opinion, property funds offer a competitive pathway into the growth of the world’s most robust cities. But the structure of the fund is just as critical as the location of the assets it holds. Whether it’s a first mortgage fund offering senior security, a preferred equity fund providing prioritised returns, or a REIT giving liquidity in a global portfolio, each comes with its own balance of risk, return, and flexibility.
As investors increasingly look to Sydney, London, New York, Seoul, and other economic hubs, the key is not just asking where to invest, but how. At FivePearls, we focus on matching market opportunity with the right structure, because in our experience, that alignment can be the difference between meeting your objectives and falling short.