Commercial real estate has been used effectively in ultra-high-net-worth (HNW) and family office portfolios as a means to enhance yield in a return‑starved market. This enhanced yield has not been lost on the greater institutional marketplace, however, where sovereign wealth funds, domestic pension funds and life insurance companies have flooded the market with capital, prompting concern over the potential for a pricing bubble.
So why does real estate remain appealing to high-net-worth investor portfolios?
It is important to remember that real estate still functions predominately within a private marketplace, and with certain inefficiencies that, when properly priced and sourced, can provide returns in excess of comparable benchmark indexes. Real estate still offers predictable cash flows, tax benefits and a hedge against inflation, and thus remains highly appealing; most HNW’s and family offices are targeting as much as 10 to 15 percent of their investment portfolio to real estate.
Real estate investing today vs. in past cycles is buoyed by a predictable debt and equity market, a greater educated real estate workforce and transparency of reporting with access to immediate valuation. Taken together, this permits sophisticated investors to continue allocating capital to real estate with predictability of performance.
The sphere of real estate investment opportunities for HNW investors is widening
Today’s real estate investment landscape has broadened for HNW investors with the ability to customize their investments regionally, by product type, by sponsor and within both debt and equity investments. Further, HNW investors can tranche their real estate investments across varied risk-return scenarios for appropriate diversification. Often, these investors deploy capital without competing directly with institutional investors.
Larger investment firms typically put capital to work in gateway cities and in larger investment amounts, providing opportunity within the middle market for transactions in the $20 million to $75 million range, and in non-gateway cities such as Denver, Portland, Ore., Salt Lake City and Phoenix, where fewer competitive buyers exist.
Interestingly, these non-gateway cities display many positive demographic trends, including continued job growth that enhances property rent rolls and income performance. In the West, these demographic trends have provided certain supply and demand imbalances that produce attractive market rental increase opportunities and enhanced exit liquidity.
There are always challenges. What are the solutions?
Most HNW’s and family offices succeed in sourcing a consistent pipeline of opportunities through regional and relational sponsors, who in turn are sourced directly or through third-party investment management firms, and thus create a diversified basket of real estate investments.
Many in this investment group have also become more active in their sourcing by investing in debt transactions, taking advantage of the tightened banking regulatory environment to access a real estate product more akin to a fixed income investment.
Both of these approaches require sophisticated investors to be more active in sourcing and underwriting their real estate investments to ultimately recognize this increased yield opportunity. For sponsors, the ability to deliver sound investment opportunities is met with consistent demand for a higher real estate allocation among HNW investors and family offices.
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