Using Private Real Estate To Generate Yield

Investing in publicly traded or private real estate is the question. They don’t have to be mutually exclusive, but they present different sides of the same coin and they have their respective advantages and disadvantages.

The case of investing in private commercial real estate was recently heard in a webinar by Black Creek Group, a Denver-based real estate investment management firm. It was part of the Investments and Wealth Institute’s ongoing series of webinars that focus on a specific industry topic or topic, and this particular presentation focused on how investors can use real estate to generate returns.

According to Black Creek industry statistics, the commercial real estate sector was the third largest asset class by US market capitalization in the fourth quarter of last year, at $ 15.2 trillion. It was followed by publicly traded stocks ($ 46.9 trillion) and Treasuries ($ 23.6 trillion).

Commercial real estate includes multi-family, office, industrial, flex, retail and hotel properties. Many investors access this segment through publicly traded real estate mutual funds, which can be purchased as standalone stocks or as part of mutual funds or exchange-traded funds.

Listed commercial properties offer investors more liquidity and lower costs and are valued on a daily basis. But, as Black Creek pointed out, they are subject to the volatility of the public markets and can trade at prices that differ from book value.

“Public real estate comes with a major risk that resulted in a 30% decline in the depths of Covid in 2020,” said Ryan Strauser, senior vice president of product management at Black Creek Capital Markets, the sales arm of Black Creek Group. “The year was down 9%. Based on the standard deviation, it is somewhat more volatile than the S&P 500. “

According to the National Council of Real Estate Investment Fiduciaries (NCREIF), a data provider for the institutional real estate investment market, private commercial real estate grew 1.6% over the past year.

Strauser noted that the private real estate sector (including the 2008-2009 global recession) had four years down while the S&P 500 index was down seven years and the Bloomberg Barclays Aggregate Bond Index was down eight years Period.

“Only when you have financial crises like the 2008-2009 financial crisis does it affect the real estate market,” Strauser said. “Recessions in the garden area do not necessarily have an impact on private properties.”

He added that there are several ways to invest in private real estate. One is through direct ownership, the other through a net asset value or NAV REIT. “Since they are not publicly traded, they are valued at longer intervals,” said Strauser.

Earnings drivers

As advocated by Black Creek, the benefits of private commercial real estate include lower volatility than stocks, portfolio diversification through low correlation with stocks and bonds, the ability to hedge against inflation, and income-related returns.

“Probably the main attraction is that it is an income generating asset,” commented Strauser.

During the webinar, Strauser noted that private real estate historically had an average annual income-related return of 5.7% versus 5.0% for public REITs, 3.4% for bonds, 2.1% for stocks and 1.4% have scored in cash. Overall, more than 70% of total private real estate returns come from income generated.

Strauser explained that the four main drivers of commercial real estate are population growth, GDP growth, the globalization of the economy (which leads to FDI in US real estate), and the industrial e-commerce revolution that brings with it distribution warehouses.

He is particularly optimistic about the e-commerce aspect, which he believes is still in its infancy. “In 2020, only 15% of retail sales were online, a 32% increase over the previous year,” he noted. “It is forecast to expand to 19% by 2024 and 30% by 2030.”

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