Real estate fund jargon explained in plain language

Direct return comes from the ongoing income generated by the real estate, primarily rental income, after deducting costs such as maintenance, property management, financing expenses and other fund or property-related costs.

Indirect return results from an increase in the value of the real estate. This can occur, for example, when a property is acquired at an attractive price, lease agreements are improved, vacancy is reduced, the asset is upgraded or made more sustainable, or when the property is ultimately sold at a higher value.

Why does it matter?
For a real estate fund, this distinction shows where the expected return comes from. Does it primarily rely on stable rental income, or on the appreciation of the properties?

For the investor, this difference is important because direct return is more tangible. Rental income can be distributed periodically, providing a steady cash flow. Indirect return, on the other hand, is reflected in the value development of the fund and typically only becomes visible upon revaluation or sale of the underlying real estate.

An expected total return can therefore consist of both components. However, it is important to understand which part is already generated from ongoing income and which part depends on future value growth.

Why does it matter?
For the fund, it is important that distributions are aligned with actual cash flows. A real estate fund must retain sufficient capital for maintenance, financing costs, vacancy, acquisition expenses and other obligations.

At Benkey, we apply a fixed quarterly distribution of 1.25%. In addition, fund management may decide to make an extra distribution, for example when there is sufficient financial room to do so. Investors are informed accordingly and can choose each quarter, via the portal, whether they want to receive this additional distribution.

For the investor, it is important to understand that distributions and returns are not always the same. A fund can build value without distributing large amounts, while conversely a fund may pay out distributions even though the overall return still depends on the development of property values.

That is why it is important to ask: is the distribution generated from healthy rental income, realised profits, or from reserves?

Why does it matter?
For a real estate fund, NAV is an important indicator of the value of the portfolio. If property values increase, the NAV may rise as well. If property values decline or debt levels increase, the NAV can come under pressure.

For the investor, NAV provides insight into the underlying value of their participation. It helps assess whether the fund is growing in value, remaining stable, or decreasing over time.

Why does it matter?
For the fund, leverage can help acquire more real estate than would be possible using equity alone. This allows rental income and value growth to be generated across a larger portfolio.

For the investor, leverage works both ways. When performance is strong, it can increase the return on invested capital. However, if property values decline, rental income falls short, or interest rates rise, leverage can also amplify risk. The use of external financing may lead to additional financial pressure or even forced sales in adverse scenarios.

Why does it matter?
For a real estate fund, LTV shows how much leverage is being used. A higher LTV can increase returns on equity, but it also increases risk.

For the investor, LTV indicates the margin of safety. With a lower LTV, there is more buffer if property values decline. With a higher LTV, a drop in value can have a more immediate impact on the fund, especially if interest rates rise or financing conditions change.

Why does it matter?
For the fund, equity forms the foundation of the portfolio. Without sufficient equity, it becomes more difficult to acquire real estate or secure financing.

For the investor, equity is important because it participates in the fund’s profits, value growth and risks. It offers upside potential, but is also exposed to downside risk if property values decline or performance falls short.

Why does it matter?
For a real estate fund, a high occupancy rate is beneficial because it generates more rental income. Vacancy generally results in lower income, while many costs continue regardless.

For the investor, the occupancy rate provides insight into income risk. A portfolio with stable tenants and low vacancy is typically more predictable than a portfolio where a significant portion of the space still needs to be leased.

Why does it matter?
For a real estate fund, WALT provides insight into the predictability of future rental income. A longer WALT means that lease agreements, on average, continue for a longer period.

For the investor, a longer WALT is often attractive because it offers greater certainty around future cash flows. A shorter WALT can also create opportunities, for example to renegotiate lease terms or attract new tenants, but it comes with increased leasing risk.

Why does it matter?
For a real estate fund, the cap rate is used to value properties and compare them with one another.

For the investor, the cap rate reflects the relationship between price and income. A higher cap rate may seem attractive, but it can also indicate higher risk, for example due to the location, tenant quality, condition of the property, or shorter lease terms.

Why does it matter?
For a real estate fund, IRR can be used to compare projects or overall fund performance. It measures not just how much return is generated, but also when that return is realised.

For the investor, IRR is particularly relevant because real estate returns are typically spread over multiple years. Rental income may be distributed along the way, while value appreciation often becomes visible later, for example upon sale or revaluation.

Why does it matter?
For a real estate fund, liquidity is important to meet obligations, fund maintenance, and manage potential investor redemptions. In practice, this is carefully balanced, as real estate assets cannot always be sold immediately without impacting value.

For the investor, liquidity matters because real estate is less easily tradable than, for example, listed equities. A property cannot be sold overnight without potentially making concessions on price. That is why it is important to invest only capital that can be committed for a longer period of time.

Why does it matter?
For a real estate fund, an open-end structure provides flexibility to grow. New capital can be used for additional acquisitions or to further expand the portfolio.

For the investor, an open-end fund can be attractive because it may offer more flexibility than a closed-end fund with a fixed term. At the same time, there are often conditions attached to exiting, as real estate itself is not immediately liquid.

Why does it matter?
For the fund, diversification helps reduce risk. If one tenant leaves or one property becomes vacant temporarily, this does not necessarily impact the entire portfolio.

For the investor, diversification means that performance is less dependent on a single property, tenant or market development. It generally makes the fund more stable and better able to withstand potential setbacks.

Why does it matter?
For a real estate fund, asset management is a key driver of value creation. Returns do not only come from market movements, but also from active management of the underlying assets.

For the investor, strong asset management shows that the fund is not passively waiting. Instead, it actively works to improve the value of the real estate and to make rental income more stable or increase over time.

Why does it matter?
For a real estate fund, effective property management ensures stable operations. It helps keep tenants satisfied, control costs, and resolve issues quickly.

For the investor, this is important because poor day-to-day management can lead to higher costs, dissatisfied tenants, increased vacancy, and lower rental income.

Why does it matter?
For a real estate fund, due diligence helps identify risks before capital is committed. Are the lease agreements strong enough? Are there technical issues? Is the valuation accurate? Are there any legal restrictions?

For the investor, a thorough due diligence process demonstrates that the fund operates professionally and does not invest based on assumptions or attractive return projections alone.

Would you like to see what such an acquisition process looks like in practice? Click here to download the whitepaper.

This may include identification, the source of funds, and checks against sanctions lists.

Why does it matter?
For the fund, KYC is mandatory and essential to comply with regulations related to anti-money laundering, fraud, and the prevention of terrorist financing.

For the investor, it may feel administrative, but it also protects the integrity of the fund. A robust KYC process contributes to a professional and trustworthy investment environment.

Why does it matter?
For the fund, this is the central document used to inform investors.

For the investor, it is essential to read this document carefully. It is not only about the expected return, but also about the risks, costs, investment horizon, exit conditions, valuation methods, and any applicable safeguards.

Why does it matter?
For the fund, the management fee enables professional management. This includes fund administration, reporting, property acquisitions, asset and property management, investor relations, and oversight of the portfolio.

For the investor, it is important because costs directly impact the net return. It is not only about the gross income generated by the real estate, but ultimately about what remains after all fees have been deducted.

The hurdle rate is the minimum return that must first be achieved for investors before the manager becomes entitled to that performance fee.

Why does it matter?
For a real estate fund, this structure can create better alignment between the manager and the investor. The manager only earns additional compensation if the investor also achieves a certain level of return.

For the investor, it is important to understand when and how this fee is calculated. A well-designed structure rewards actual performance, rather than temporary increases in value on paper. The hurdle rate ensures that the manager is not rewarded too early or too easily.

Why does it matter?
For the fund, AIFMD determines which licences, registrations, reporting obligations or exemptions may apply.

For the investor, this is important because regulation contributes to transparency, oversight and professional fund management. It does not mean an investment is risk-free, but it provides a framework within which the fund must operate.

For the fund, clear language creates trust, transparency and more professional communication with investors.

For the investor, understanding these terms leads to better questions, more realistic expectations and a clearer view of the relationship between risk and return.

Ultimately, successful investing is not about memorising every technical term. It is about understanding what happens to your capital, how rental income is generated, how property value is created, and which risks come with it.

Real estate is tangible. But fund structures require clear explanation. That’s exactly where trust begins.

Curious to see what investing in real estate funds looks like in practice? During a personal introduction, we will take you step by step through our approach — open and transparent. Within 30 minutes, you will have a clear understanding of the investment strategy, expected returns and key considerations. Click here to schedule a meeting at a time that suits you.