Over the short term, stocks often move in the same direction. That's great when the market is rallying, not so much when it's in free fall. While having a diversified portfolio can help cushion the blow, the market's overall correlation usually means most stocks still move in relative unison during periods of turmoil like we've seen recently.
However, the private real estate market functions much differently. The underlying values of commercial properties don't move in unison with the stock market's daily gyrations. Because of that, private real estate can be a great place for investors to consider if they want to reduce their portfolio's overall volatility.
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The advantages of private real estate
Real estate is the third-largest asset class behind the stock and bond markets. The U.S. commercial real estate market's current value is around $21 trillion. While some real estate trades on public stock market exchanges -- the current market capitalization of all publicly traded real estate investment trusts (REITs) is around $1.5 trillion -- most commercial real estate is in private hands. Holders of private real estate include private equity funds, endowments, pension funds, non-traded REITs, and wealthy investors.
There's a reason so many institutional and wealthy investors own private real estate. It has produced better returns with less volatility than the public stock and bond markets. Over the last 20 years, private real estate has been 71% less volatile than public REITs. Meanwhile, it has consistently distributed an attractive income yield that has historically outpaced listed REITs, bonds, and stocks.
Because of that, adding private real estate to a portfolio can help reduce its volatility while improving returns. For example, a traditional 60/40 portfolio mix between stocks and bonds has produced an average annual total return of 7.7% over the last two decades with 9.7% volatility. However, adding a 10% weighting to private real estate (and adjusting the remaining mix to 55% stocks and 35% bonds) has improved the average annual return to 8% while cutting volatility to 8.9%.
How to add some private real estate to your portfolio
Investors don't have to buy a commercial building to invest in private real estate. Several top-tier private equity firms sponsor a non-traded REIT open to most individual investors. The biggest in the sector by far is Blackstone Real Estate Income Trust (BREIT), managed by leading alternative asset manager Blackstone Group (BX -1.86%). BREIT raised nearly $25 billion from investors last year, almost 70% of all the money hauled in by non-traded REITs. That has given it the funds to go on a REIT shopping spree.
Other notable non-traded REITs sponsored by private equity giants include:
- Starwood Real Estate Income Trust (SREIT): Sponsored by leading real estate investor Starwood Capital, SREIT was second to Blackstone in raising capital last year.
- KKR Real Estate Select Securities (KREST): Sponsored by private equity giant KKR (KKR -1.49%), which formed KREST last year to capitalize on growing investor demand for private real estate.
- Brookfield Real Estate Income Trust (Brookfield REIT): Leading alternative asset manager Brookfield Asset Management (BN -0.79%) took over the advisory role of Oaktree's non-traded REIT last year, seeding it with new assets to drive growth.
Investors can purchase shares of most private-equity sponsored non-traded REITs for a relatively low minimum investment of $2,500. However, they can only purchase them through a financial advisor. Furthermore, they must also meet minimum suitability requirements (typically a net worth of at least $250,000 or a gross annual income of at least $70,000 and a net worth of at least $70,000).
Another way to invest in private real estate is through real estate crowdfunding sites and other direct-to-consumer portals. For example, Fundrise allows anyone over 18 to invest in one of its real estate funds for as little as $10 to start.
Meanwhile, investors with more capital can invest directly in curated properties and private real estate funds at sites like CrowdStreet and EquityMultiple for as low as $5,000. However, they must meet the accredited investor threshold -- those with a net worth above $1 million, excluding the value of their primary residence, or income over $200,000 annually ($300,000 with a spouse) in each of the last two years.
Reduce volatility's sting without hurting returns
Private real estate can be an excellent investment. Historically, it has been significantly less volatile than the stock and bond markets while still offering attractive total return potential. Because of that, investors who are currently feeling the sting of public market volatility might want to consider adding some private real estate to their portfolio to lessen that blow in the future.
