Real Estate Advantages

Direct real estate investment fosters diversification and has been shown to enhance overall returns in a carefully structured investment portfolio. The importance of diversification has never been more compelling or more clearly understood than in the current market environment.

Diversification Benefits
Successful investment strategies are often geared toward achieving what economists refer to as the “efficient frontier”, the highest possible return for a given level of risk and associated volatility. Portfolio diversification, through the addition of directly owned real estate assets as well as other alternative investment products, has been shown to dampen portfolio volatility at all return levels. The inclusion of direct real estate ownership into a diversified portfolio of investment assets has the further benefit of reducing a portfolio’s vulnerability to the effects of inflation. In contrast, the performance of publicly traded real estate instruments is closely correlated to that of other equities and thus does not markedly improve the risk adjusted return of an otherwise equity focused portfolio. Notwithstanding current income and appreciation potential over time and the benefits of a particular business strategy or management team, the ownership of REIT shares fails to accomplish the goal of maximizing return and reducing risk through portfolio diversification into the real estate sector.

Focus on Alternative Investments
The equity market’s uneven performance and volatility have forced investors to lower their overall return and performance expectations and to seek alternative products to traditional stock and fixed income investments. Concerns about inflation and rising interest rates, potentially leading to the erosion of wealth, are widespread. Return of capital has become as relevant an investment measure as return on investment to active investors in the current market environment. In this climate, investors are seeking alternative investments that:

  • Are less vulnerable to market cycles and inflation
  • Act as a hedge to diversify overall portfolio return
  • Yield steady income
  • Preserve wealth
  • Offer a low correlation to other traditional asset classes
  • Demonstrate the potential to generate attractive capital growth
  • Help move an investment portfolio closer to the “efficient frontier”

Attractive Alternative Asset Class
Real estate has emerged as one of the most attractive options for asset diversification and reallocation. Real estate’s low correlation coefficient with equity and fixed income markets helps to hedge overall portfolio returns, while producing the potential for higher returns on a risk adjusted basis. By adding real estate to a balanced portfolio, investors benefit from reduced vulnerability to economic cycles. Real estate also provides tax structuring and deferral benefits, acts as a hedge against inflation and excessive market volatility, and is a defense against recession.

It is not surprising that most institutional investors have increased their commitment to real estate and other alternative investments in their asset allocation models. Many institutional portfolio models incorporate real estate as a core asset class comprising approximately 5.0% to 10.0% of a typical investment portfolio.