Months after the onset of Covid-19, we continue to see its impact on a global scale. While world leaders and business communities work hard to reinvigorate economies, experts predict we’ll feel the effects of this disruption for years to come. The scope and suddenness of this crisis are urging investors to ask key questions about portfolio composition: How resilient is my portfolio? How have my allocations withstood market volatility? Have I diversified my options to the fullest extent?
Family offices (private wealth management advisory firms that serve ultra high net worth (UHNW) investors) and endowment funds have long reflected the benefits of direct real estate investing, but it’s proven to be a stable base now more than ever. In the midst of market uncertainty, now is an ideal time to explore the composition of your portfolio and consider adding direct real estate to stabilize the swings of stocks and bonds.
Embrace stability over liquidity
Family offices have a long investment horizon, making them more likely to invest in illiquid assets, such as hedge funds, private equity and real estate. Meanwhile, the typical consumer invests exclusively in liquid investments. These investors do not tend to have as high of an allocation of real estate because it limits their ability to shift in a pinch. In the event that those funds are best used elsewhere, investors can access them quickly and nimbly. But investors often don’t recognize that liquidity increases the volatility of their portfolio, while less liquid real estate stabilizes the portfolio.
People with money to invest who are looking to foster increased discipline can learn from family office investors and endowment groups by overcoming the appeal of liquidity. Boosting allocations in real estate can empower the average investor as they navigate the ebbs and flows of the market. Real estate provides a stable anchor to a portfolio because real estate values move slowly and provide built-in inflation hedging. In addition, private real estate investment returns are typically higher because investors are trading liquidity for longevity.
Increase your buffer
An extended horizon makes room for appreciation. While stocks might fluctuate, savvy real estate transactions will carry on to infinity. This steadiness has led family offices to explore this vehicle more often as they seek to diversify. According to the 2019 Global Family Office Report from UBS and Campden Wealth, real estate has become the third-largest asset class on family offices’ radar, with allocations making up 17% of the average portfolio.
Investors who are willing to increase real estate allocations even slightly can see the returns of this cash-driven category. In the midst of market uncertainty, investors will continue to receive income. We can’t avoid the repercussions of an inflationary market, but real estate with built-in rental rate increases can help maintain the value of the portfolio.
Abandon absolutes
We find ourselves looking ahead to a time of great opportunity, but make no mistake about it: The answer to long-term resilience doesn’t lie in one asset class. Diversification is crucial to ensuring that your portfolio is balanced enough to withstand the peaks and valleys of the market.
If you have a growing portfolio and are looking to diversify, industry experts recommend just a moderate increase in real estate investments to start — from 5% to 10% or 15%, for example. This investment should be made in direct real estate spread across multiple properties, typically through a private real estate fund.
These investment vehicles have historically delivered competitive total returns based on steady dividend income and long-term capital appreciation. Private real estate investment benefits from low correlation to stocks and bonds, unlike publicly traded real estate investment trusts (REITs). Complement this effort with continued investment in stocks, bonds and other shorter-term assets as a means of maintaining stability.
If there’s one lesson we can learn from Covid-19, it’s that optimal asset allocation is critical for long-term gain. In this time of fluctuation, family offices and savvy investors are seeing the benefits and stabilizing effect of real estate in their portfolio. The same can be true for any investor willing to expand their horizons to direct real estate investments. Start small, and maintain variety. Let illiquidity hone your expertise for a portfolio that stands the test of time.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
Source: Forbes
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