Private real estate: An essential portfolio component

As investors grow weary of the constant agitation in the traditional public markets, they are looking for alternative ways to generate stable income, preserve their capital, protect against market volatility and achieve an attractive total return.

Investors are realizing that simply spreading their stock holdings across more geographic regions or sectors is not providing them with financial diversification or protection. When things go wrong, and that seems to be happening more and more, the sell-off in public equities is sharp and indiscriminate, and the vast majority of publicly-traded stocks take a beating.

Investment professionals are now looking to the leading pension plans and endowment funds to gain insight into how to better protect their clients’ investment portfolios.

After enduring numerous stock market roller coasters, pension plans and endowment funds, who have very predictable liability streams, began to look for ways to significantly reduce the volatility of their investments to ensure they could increase their ability to meet their future payout commitments.

Over the last 20 years, CPP, OMERS, OTPP, CalPERS, Yale Endowment and Harvard Endowment have all substantially increased their relative holdings in real estate and other alternatives to reduce the overall volatility of their investments.  This trend has slowly been trickling down to high net worth investors, who realized that alternatives are an important part of a modern investment portfolio.

Alternative investments should be included in investment portfolios because they provide real diversification benefits, enhanced returns, generate income, reduce volatility or, in some cases, all the above.

For example, private real estate investments offer investors the potential for equity gains during times of economic expansion and the downside protection of a stable income source via cash flow from operations in periods of economic contraction.

Because private real estate has limited correlation to almost all other investments, including public REITs (real estate investment trusts), private real estate should be a key component in any optimum asset mix.

Unfortunately, most individual investors do not have the capital or the management skills to achieve direct ownership of apartment buildings, and, therefore, the vast majority of investor portfolios are currently sub-optimal.

Both public and private REITs expose investors to real estate in a marketable security that provides regular, tax-advantaged income, as well as, an added bonus of potential capital appreciation, should the properties increase in value. The historical returns of public REITs, however, are highly correlated to the performance of the overall equity markets and, as such, provide hardly any additional diversification when added to an investor’s portfolio.

Private REITs, which have limited correlation to most publicly-traded stocks and bonds, offer an additional layer of real diversification and can create wealth for investors.  And, as many experts agree, the single most important factor to building wealth is the mix of assets over the long term.  Proper diversification will optimize returns and reduce volatility over time.

Investing in private REITs is an effective way to diversify a portfolio and establish a steady income stream without sacrificing growth potential.  And, by investing in real estate through a REIT, you get the following additional growth drivers:

  • A REIT has the potential to bring synergies to individual properties, creating value that otherwise would not exist.
  • A REIT has professional managers, whose objective is to seek out steadily increasing distributions and capital appreciation over the long term.

Many investment professionals now view real estate investments as an essential part of any modern portfolio.  And with the current uncertainty around economic growth, it may be time to re-evaluate your investment portfolio, as one’s potential risk may be underestimated.  Investing in a private REIT could help you stabilize or strengthen your investment portfolio in an uncertain future.