NEW YORK — Ask 10 commercial real estate experts to define exactly what constitutes a high-net-worth investor, and chances are you’ll come up with several different answers. But query these professionals on the finer points of developing a successful investment strategy for these well-heeled clients typically worth $5 million or more and one word keeps popping up — diversification.
"If you have $10 million to invest in real estate, you could pick one asset in one market and hope that you pick the right one," says Mary Hager, managing director of-based Crow Holdings, an investment office for parent company Trammell Crow. "But you’re going to make a mistake occasionally, so we prefer to have that investment in a portfolio of assets across the country, across product types as opposed to just making a single bet. Diversification is very important to us," adds Hager. For that reason, Crow Holdings currently invests in a real estate fund.
Hager’s remarks came during a panel discussion as part of "The High-Net-Worth Real Estate Investing Symposium" presented by the Information Management Network. The day-and-a-half event at the Roosevelt Hotel in New York City attracted 250 attendees, about one-third of them direct investors. Other attendees included private bankers and advisers. Symposium organizers say the turnout exceeded expectations and is a sign of a hearty investor appetite for commercial real estate.
The breakout sessions focused on a range of timely issues, including a comparison of real estate funds, REITs and direct property ownership; wealth preservation; a macro overview of the industrial, office, multifamily and retail markets; alternative investments such as vineyards and timber; the tax implications of real estate; and the relationship between real estate private equity and family majority ownership.
Lure of real estate
To understand why high-net-worth investors are so attracted to commercial real estate even as vacancies are rising across several product types — most noticeably the office market — one has to look no further than the closely followed NACREIF (National Council of Real Estate Investment Fiduciaries) Index. Tracking primarily unleveraged, institutionally held core real estate investments throughout the country, the index has posted an average annual return of 10.4% over the past eight years. And given today’s tumultuous stock market, investors have placed a premium on low volatility. Real estate’s transparency certainly helps.
Both the NACREIF Index as well as the NAREIT (National Association of Real Estate Investment Trusts) index have low correlations vs. stocks and bonds, explains Jeffrey Title, principal of Guggenheim Real Estate, an investment and management firm. In other words, REITs and private real estate help diversify an investment portfolio. "What you are seeing from these return profiles is that real estate as an asset class has had historical returns somewhere between stocks and bonds," adds Title, referring to the indexes.
Investors need to do their homework
Aside from diversification, panelists advise high-net-worth investors to develop clear objectives. And if they’re investing in any open-ended or close-ended funds, which frequently range from $500 million to $1 billion, investors must perform due diligence to ensure that their interests are aligned with those of the fund manager, experts advise.
"What’s different about conducting due diligence on an asset or a portfolio versus a fund is that a fund is a blind pool [the investors don’t know at the time of their capital outlay what properties are going to be acquired or developed]," says Doug Weill, managing director of the Real Estate Private Funds Group for Credit Suisse First Boston. "You need to understand the ways these funds are structured and organized and what you’re getting for your money."
Access to quality market information is a problem for many high-net-worth investors, acknowledges Title of Guggenheim Real Estate. "How does an investor who isn’t a real estate expert have enough information to really make a decision that now is the time to invest in retail in Southern? The manager that you pick is of critical importance," he says.
The real estate funds being launched today run the gamut, Title explains, ranging from widely diversified open-end funds to regional funds to funds that focus on certain types of properties. Limited partnerships may also invest in one or more properties.
"The problem that [high-net-worth] investors are facing is that access to these types of investments is very sporadic," says Title. "Real estate largely has been a local game. Local offices or local investors are largely going to be exposed to local operators in their market."
At least two panel members indicated that because so much capital is chasing real estate in the primary cities while ignoring secondary markets such as Nashville, Tenn., opportunities abound in those tertiary markets.
From the gridiron to business
Ronnie Lott, a former San Francisco 49ers player who was elected to the Pro Football Hall of Fame in 2000, served up the keynote luncheon address at the symposium. An investment manager, Lott and two of his former teammates run Champion Ventures, a private equity fund-of-funds manager. He also is co-founder of Olympius Capital, a minority-owned private equity firm that offers hedge funds-of-funds and other private equity products.
Lott cites similarities between building a championship-caliber sports team and creating premium-quality investment vehicles for investors. As he passed his Super Bowl rings around the ballroom, Lott remarked: "The reason I show you these three rings is that’s our IRR (internal rate of return). That’s what we live for."