Real estate investments provide stability in volatile markets and increase portfolios’ risk-adjusted returns. Institutional investors have known this for a long time and have taken advantage of real estate investment opportunities that were targeted to them. Now, new funds that are open to all investors provide individuals the opportunity to enjoy the benefits of investing in private real estate equity projects, benefits which are no longer reserved only for large institutional investors.
Real Estate Investments Diversify Portfolios
According to modern portfolio theory, adding uncorrelated assets to a portfolio increases risk-adjusted returns. Private real estate funds are an ideal addition to the portfolios of long-term investors because they have a low correlation with stocks and bonds.
Individuals allocate an average of only 5 percent of their portfolios to alternative assets, including real estate. The optimal amount is 10 to 20 percent. Institutional investors that have a diversified asset-class mix outperform their peers. The Ivy League endowments, for example, which invest significant percentages of their portfolios in real estate, perform better than other university endowments and also outperform a standard 60/40 stock/bond portfolio mix.
In the past, only institutional investors had access to direct investing in real estate projects. The investment landscape, however, is changing, unlocking the opportunities of private real estate equity investing for individual investors.
Private Real Estate Investments Are Less Volatile
When the market drops, private real estate investments add stability to portfolios. These investments are less volatile than stocks. Because their value is based on the actual value of the property, private real estate investments are even less volatile than public REITs, whose shares are subject to market forces. Unlike private real estate equity funds, the value of public REIT investments can deviate significantly from the underlying property’s value.
Smaller Real Estate Investment Funds Have an Advantage
Large private real estate equity funds for institutional investors used to be the only option for investing in real estate projects. Now, all investors have the opportunity to invest in real estate from the ground up alongside the developers.
In addition to providing greater access, these new funds offer several advantages over the older and larger funds. Smaller funds are more efficient, losing less money to middlemen. The interests of fund mangers in ground-up funds is more closely aligned with their investors. The result is that smaller funds can have returns that are as much as two times higher than the better-known larger funds.
High-performing small real estate equity funds are a smart way to help protect your clients’ portfolios from declining economic growth and increased market volatility. They provide the potential for higher returns and are ideal additions to diversify portfolios consisting of stocks and bonds, especially for risk-conscious and long-term investors.