For high net worth individuals looking for an attractive investment vehicle, commercial real estate currently offers many advantages, including attractive returns compared to other asset classes and a hedge against inflation.
There are myriad ways to build up a real estate portfolio, including through sponsoring acquisition funds, buying REIT shares and investing in notes secured by commercial assets. But commercial real estate professionals caution high net worth individuals against assuming direct ownership of properties. They suggest working with experienced advisors instead.
According to the participants in the Alternative Investments Panel, presented at the Strategic Real Estate Investment Conference, today’s extremely segmented market environment and the inherent complexities of commercial real estate investment and operations would make it challenging for a novice to successfully manage a commercial real estate asset. In addition, working with professional fund managers who can offer a variety of products makes it easier to find real estate investments that can fulfill a variety of specific goals, according to Heather Goldman, managing director with Brookfield Investment Management, a global alternative asset manager.
“Real estate has different roles in different portfolios,” she notes, adding that a company of Brookfield’s stature (with roughly $150 billion of assets under management) invests in everything ranging from mutual funds to REITs to securitized notes and covers multiple property sectors. As a result, it offers high net worth individuals the kind of portfolio diversification they could never achieve by spending $1 million to buy a single asset.
Plus, there is the issue of property fundamentals on the most basic levels. Individuals who have had no previous experience in real estate investment might not be able to discern all the nuances of buying a multifamily building in New York versus an office facility in North Carolina. But professional fund managers know all the advantages and disadvantages inherent to both.
According to Jonathan A. Schein, practice leader for NREI, who hosted the Panel, “We are discussing real estate as an alternative investment and there are many ‘alternatives’ available within this asset group.”
For example, some companies and funds may focus on acquiring top-tier assets in core markets, which hold up better during economic downturns and offer stable cash flows, but will likely deliver low long-term yields because they have extremely high price tags and might require more leverage. Others, such as Wharton Equity Partners, a privately held alternative asset manager, prefer properties in secondary markets, where higher cap rates and expected population growth may deliver better long-term returns (and make refinancing easier when interest rates inevitably shoot up from today’s historically low levels).
“What gets me nervous right now is what we’re seeing in core cities in cap rates,” says Peter C. Lewis, founder, chairman and president of Wharton Equity. “This is 2006-2007. This is why we’re looking at some of the markets” where capitalization rates are comparatively high.
Still other companies may offer investors the opportunity to reap the benefits of niche product. 5 Stone Green Capital, for instance, prefers environmentally-sustainable assets. Because 5 Stone expects so-called “green” buildings to become the standard in the future, Douglas Lawrence, the firm’s principal, says that such assets might offer a better deal for investors who want to preserve value for their children and grandchildren.
On the other hand, Nevin Sanli, founder of Astrum Investment Management, has been putting his investors’ money into office, industrial and warehouse space in the Los Angeles area through what the company describes as a sale, leaseback buyback strategy.
All of these products have their place, but it takes experienced professionals to differentiate between them and pick the right ones for specific investors’ portfolios.
“We’re back to where real estate can be bought and you can actually make money,” said Jonathan B. Schultz, co-founder of Onyx Capital Partners, a private equity firm. “But it’s not easy—you’ve got to understand the guts of bricks and sticks.”
The conference was held on June 7 and produced by National Real Estate Investor, REP., Trusts & Estates and the newly launched WealthManagement.com in New York City. More than 150 wealth management and commercial real estate professionals attended the event.