Private real estate: What benefits does it offer in the current market?

In the bustling world of investments, private real estate consistently emerges as a compelling alternative asset class. It offers a promise of portfolio diversification and a steady income stream. However, recent upheavals, such as the COVID-19 pandemic and fluctuating interest rates, have posed significant questions about its future. To understand the risks and opportunities in private real estate, Brent Jenkins, Managing Director and Portfolio Manager at Clarion Partners, joined Ryan Nauman on the Adjusted for Risk podcast to share his insights into the evolving landscape of this alternative asset class.

The role of real estate in portfolio construction

Private real estate can significantly enhance a portfolio by improving risk-adjusted returns, particularly as part of a diversified mix, including stocks and bonds. Brent emphasized the stability and income generation potential of real estate investments. With low correlation to public markets, real estate acts as a robust inflation hedge. This characteristic explains why institutional investors often include it in their portfolios, capturing its unique benefits.

Brent highlighted that both equity investments, like direct ownership of buildings and debt investments (such as non-bank lending), offer substantial opportunities in the current market. The recent reset of real estate values, following a turbulent couple of years marked by rising interest rates and a banking sector strain, presents an alluring opportunity for investors looking to capitalise on both long-term capital appreciation and strong income generation.

Navigating challenges and opportunities post-COVID

The pandemic and subsequent economic shifts have redefined numerous sectors, real estate included. Brent addressed the significant impact of the regional banking crisis on real estate, given their substantial role in construction lending. Yet, he was optimistic about the market's resilience. Despite hits to office spaces, which continue to experience operational difficulties, sectors like housing and industrial warehouses thrive.

Furthermore, Brent emphasized that investors should remain vigilant and adaptable to changing conditions. Economic cycles fluctuate, and being prepared to pivot between strategies – shifting focus between equity and debt – can prove advantageous. The key lies in analysing market indicators and macroeconomic trends to determine the most profitable course of action at any given time.

Current trends shaping the market

Brent identified five key trends influencing the real estate landscape:

Demographics

As millennials enter their prime income-earning years, demand patterns shift, affecting both investment strategies and residential trends. Recognising these demographic tides helps investors align their portfolios for future demands.

Housing

Faced with both a housing shortage and affordability issues, the sector requires innovative solutions. This dual challenge impacts both the rental and for-sale housing sectors, presenting unique opportunities for real estate developers and investors alike.

Innovation and technology

The rise of e-commerce giants like Amazon is transforming retail spaces into robust industrial supply chains. This has a ripple effect, boosting demand for industrial warehouses and reshaping traditional retail landscapes.

Trade and manufacturing

Onshoring trends, particularly in North America, are reshaping local economies. Areas hosting new manufacturing plants, like Taylor, Texas, are poised for significant growth, affecting residential and commercial real estate markets.

Resilience

Whether it's adapting to climate challenges or navigating insurance costs, resilience is key. Investors must consider long-term sustainability when choosing assets to ensure enduring returns.

These long-term trends not only impact real estate investments but also influence broader wealth management strategies. Financial advisors and investors alike should be cognizant of these movements and seek ways to integrate them within their financial planning to harness their potential fully.

Access points in private real estate

The evolution of access to real estate is enhancing possibilities for everyday investors. Unlike public REITs, which offer indirect exposure and are subject to market volatility, private funds such as NAV REITs provide closer alignment with underlying real estate values. Brent mentioned tender and interval funds like CPREX, offering quarterly liquidity and stable income with minimised volatility, thus serving as a substantial addition to a well-rounded portfolio.

Moreover, Brent stressed the importance of understanding the nuances between public and private real estate. While public REITs can introduce more volatility due to market dynamics, private real estate provides a more stable, less volatile addition, aligning more closely with the intrinsic value of the properties themselves.

Advice for financial advisors

For financial advisors, diversification within real estate funds is crucial. An ability to pivot between equity and debt investments based on market conditions can buffer against volatility. Brent underscored the importance of understanding a fund's composition to make informed decisions that align with a client's long-term investment goals.

Additionally, advisors should educate their clients on the benefits of private real estate as a component of a diversified investment strategy. The inclusion of real estate can enhance a portfolio's performance by not only generating income but also by mitigating risk, thanks to its generally low correlation with traditional asset classes.

Conclusion

Brent Jenkins explored the current private real estate landscape – one vibrant with opportunities despite its inherent challenges. The integration of private real estate into investment portfolios represents a strategic move that could yield notable returns while simultaneously safeguarding against market volatility. As this arena opens up to a broader investor base, understanding its fundamental drivers and long-term trends becomes increasingly vital, empowering stakeholders with the knowledge needed to make sound, future-proof investment choices.

Investors who recognise the subtle dynamics at play, embrace diversification, and remain agile in their strategies are well-positioned to harness the benefits of this asset class. As always, informed decisions will be the key to optimising portfolios and achieving sustainable growth in the years ahead.

Explore the opportunities private markets offer with the most senior leaders in private wealth management at IMpower FundForum.