Registered investment advisors (RIAs) are increasingly turning to private real estate as a way to augment clients’ performance and help them in their considerations of today’s market volatility. Indeed, private real estate is now more popular than ever with RIAs seeking steady investment returns and many consider it a key component of their clients’ allocation to alternative investments. Importantly, RIAs see the value in private real estate’s low correlation to the public market. Based on historical performance, private real estate can be a potential hedge against inflation with a similar profile to bonds’ long holding period and illiquid structure.

PCRE Advanced

RIAs Turn to Private Real Estate’s Low Correlation and Diversification in Volatile Seas

Registered investment advisors (RIAs) are increasingly turning to private real estate as a way to augment clients’ performance and help them in their considerations of today’s market volatility. Indeed, private real estate is now more popular than ever with RIAs seeking steady investment returns and many consider it a key component of their clients’ allocation to alternative investments. Importantly, RIAs see the value in private real estate’s low correlation to the public market. Based on historical performance, private real estate can be a potential hedge against inflation with a similar profile to bonds’ long holding period and illiquid structure.

MLG Capital tracks the performance of the stock market with publicly traded REITs and private real estate investments. The graph below reveals a 10-year history of how volatile the stock market (S&P 500, red line) and public REITs (IYR ETF, black line) are when compared to the widely accepted metric for tracking private real estate investments, the NCREIF (NCREIF property index, green line). It is easy to see the publicly traded investments are significantly more volatile than private real estate in this example. The graph below shows the returns of REITs and the S&P 500 are more correlated to each other than to private real estate. Too much correlation inside a portfolio, especially in volatile investments, could result in unnecessary risk. There may be more volatility to come and your portfolio should be well positioned to manage the risk. Private real estate investments provide relative stability and help investors diversify their holdings.

(*The S&P 500 is the leading indicator of US Large Cap Equities. **The IYR ETF seeks to track the investment results of the Dow Jones US Real Estate Index, which measures the performance of the publicly traded real estate sector of the US equity market. ***NCREIF Property Index is a quarterly measure of the unleveraged composite total return for private commercial real estate properties held for investment purposes only.)

A recent survey reports that: – 93% of RIAs believe clients should have alternative investments within their portfolio. – 93% of RIAs believe private real estate has a low correlation to the public market. – 80% of RIAs expect alternative investments to produce between a 5-10% return. – 60% of RIAs expect their asset managers to be in business at least 10 years.

If properly managed, private real estate can offer a unique hedge to the public markets in its ability to be held through bear markets and weather volatility often seen throughout a market cycle. Dependent on the asset manager, sunset dates or other fund provisions may trigger a liquidity event at an inopportune time. An asset manager like MLG Capital specifically does not tie itself to forced sunset dates nor liquidity timeframes. Furthermore, if a private real estate asset manager uses low to moderate leverage and strategic debt that is aligned to the overall business plan for the underlying asset, private real estate can be a great, consistent, and unique product for RIAs seeking low correlation to the public markets. Private real estate could help

RIAs hedge their clients’ portfolios in their role as active managers seeking opportunities for low-correlated, diversified returns at the upper limit of expected returns, as evidenced by the recent survey conducted by MLG Capital.

With portfolio diversification top of mind, RIAs constantly seek new ways to structure clients’ investments by account and asset type to help mitigate risk. Geographical diversity is most obvious; however, real estate investors can also diversify by asset type (apartments, retail, industrial, etc.), vintage (age of property), asset class (brand new class A to older class C), and operator (property manager/leasing agent). It is important to realize, however, that reaching this level of diversification takes a significant amount of capital, education, and time.

One way to overcome these challenges is through investing in a fund model. Read More RIA’S Turn to Private Commercial Real Estate

Menu