Article 4 of 5: Real Estate As An Investment Option
This is the fourth in a series of five pieces to help investors understand the benefits of owning commercial real estate, then differentiate the dynamics and variety of ownership channels.
The first blog of this series touts how real estate investments complement stock risks.
Briefly, real estate returns are driven largely by income, generally better hold value during market declines and appreciate in periods of higher inflation. However, there is a difference in owning direct real estate portfolios versus owning public securities.
Holding real estate through stocks and traded funds often dilutes the portfolio benefits.
Real estate stocks offer some of the highest dividends in the market, so as demand raises price the yield goes down. Many real estate funds are indexed, meaning that they reflect a broad composite of the market. This washes out tactical or cyclical opportunities, as real estate sectors move differently through economic cycles. For example, now is a good time to own apartments and distribution centers, not necessarily office buildings, hotels or restaurants.
Private (or non-traded) real estate portfolios often pay higher yields.
Direct (non-traded) funds typically price at Net Asset Value (NAV), so buyers receive more income, sometimes labeled as an illiquidity premium. Private NAV funds typically have trading restrictions, like quarterly redemptions or a multi-year lifecycle. Just as stock returns are more certain the longer you own them, the same is true for real estate and making a commitment that’s appropriate to the investment is always a better model.
Private real estate portfolios often better retain value.
Real estate stocks tend to suffer when broad markets are in decline, often getting sold early as investors seek to avoid taking bigger losses. Also, like any mutual fund, in periods of high redemption, managers must sell holdings at lower prices, which deteriorates the share price and can feed a negative loop.
Private real estate investments can target opportunity.
Because they are raising new capital, acquisitions are always made in the current environment. Whether a private offering is limited to a certain amount, or a perpetually growing fund, manager strategies and property purchases can be strategic, based on demographic, geographic and real estate sector dynamics.
If you’re interested in learning more, reach out to us about your situation.
As you learn more about avenues for investing in real property, readers can access our final installment, “Comparing Private Real Estate Solutions”