Allocating a larger portion of the overall portfolio of investments to real estate products has been a strong trend by high-net-worth (HNW) investors over the past several years. In large part, this shift has been driven by the persistent low-yield environment in fixed income and volatility of the stock market.
The shift of investment dollars toward alternative asset classes, including commercial real estate, has been steadily increasing in recent years. In the past, a traditional investment portfolio would typically allocate approximately 10 percent of its investments to alternative assets as a means of diversification. However, many HNW investors are becoming increasingly aware of the opportunities of greater diversification and now have a significantly higher percentage of their portfolio allocated to these alternative asset classes.
This is especially true with ultra-HNW investors, who are defined as those with at least $30 million in investable assets. According to the ultra-HNW peer-to-peer network Tiger 21, for the period from Q4 2017 to Q3 2018, their members had 28 percent of their portfolios allocated to real estate.
Advantages of Real Estate Investments
Why are HNW investors moving so heavily into the real estate market? Here are some of the most important reasons:
Cyclical nature of asset classes and low correlation in timing
While real estate values and stock prices, both cyclical in nature, tend to increase more or less proportionately when viewed over a longer period of time, examining shorter intervals reveals the cycles are often not in sync. This is a central characteristic that makes real estate a common choice among investors when looking to diversify a portfolio of stocks and bonds.
Real estate can be a fairly inefficient market with respect to information, among other things, which provides opportunities for the savvy investor to make high-yield plays even in low-yield environments, with a knowledgeable partner.
No “liquidity premium”
Though illiquidity can be considered a drawback for any given investment class, one advantage of being less liquid, in an investment class such as real estate, is not being saddled with the so-called “liquidity premium.” Because real estate holdings tend to reward investors who are willing to wait out rough periods in the market, a lack of liquidity is not a disadvantage.
Good hedge against inflation
Commercial real estate is a unique investment class when compared to other hard assets in that not only does it typically preserve its value during periods of inflation, but leased commercial property is an income producing asset, paying dividends back to investors. Real estate has long been recognized as a hedge against inflation, making it an essential asset class in any well-rounded portfolio.
Shifts in the retail and shipping industries
The industrial sector in particular has benefitted from specific changes in the retail and shipping sectors. In retail, the shift toward e-commerce is forcing companies to add warehousing space in order to improve the efficiency of their supply chains. Meanwhile, the U.S. shipping industry is seeing a realignment of sorts due to the expansion of the Panama Canal, which will allow an increase in the size of cargo ships bringing goods into North America [link to Xebec’s Panama Canal blog]. Both of these factors have bolstered an already strong industrial real estate market.
As an asset class, Xebec believes industrial real estate is more attractive now than it has been in recent years and is excited to continue executing its investment strategy. Xebec offers investment opportunities that fit a range of investors with different goals, yield targets and risk tolerances. With over 30 years of experience, our disciplined operating and investment strategy is designed to capitalize on opportunities to meet the expected long-term demand for institutional quality modern distribution and fulfillment centers and light industrial properties, while making those opportunities available to qualified institutional and private capital investors alike. For more information, visit https://xebecrealty.com/.