Education Centre

Real Estate Investment – No longer the “Alternative Asset”

By Gregory M. Colford, B.A., J.D., C.I.M.®

Fundscraper’s John Pizale, General Counsel, recently penned a piece imploring members of the medical profession to consider investment in private real estate when compiling their investment portfolios. See John’s piece here.

The driving recommendation in John’s piece: diversify, diversify, diversify. There are three core benefits to diversification: (1) minimizing risk of loss (i.e., not putting all your eggs in one basket!); (2) preserving capital, finding that the right mix of hopeful high flyers and the dull and reliable; and (3) generating return – think of the combustion engine: not every cylinder fires at once – so too it is with your portfolio. This article is about how real estate investment can effectively be used to diversify your portfolio.

When most folks think about diversification in their investment portfolios they generally go first to stocks! What stocks do they own, what industry groups are represented, do all the stocks tend to move together or are there enough that will move in an opposite direction to balance market swings, etc.

The more diversified investor will also add public bonds to their portfolio and will implement bond holding strategies to diversify for the same reasons. Bond holders will implement strategies like “ladders” (where bonds mature at different times and you constantly reinvest them), “dumbbells” (where sets of bonds mature at the long term and short term, but nothing in the middle) and “bullets” (invested at different times but have the same maturity date) to diversify their bond holdings.

John next introduced real estate into this mix. It’s a hard permanent asset that can deliver a reliable return that will balance out wild fluctuations in the public markets.

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Old time public market investors often viewed real estate under the broad umbrella of “alternative investments”. Alternative investments were then thought to be anything other than stocks, bonds and cash. They were not available to the public at large and generally only sophisticated investors had access to them. These asset classes were seen then as quirky niches for a select experienced wealthy few. Together with real estate, into that bucket of alternative investments was thrown private equity, precious metals, hedge products, wine, art and your dad’s stamp collection – generally any asset class to which people would attribute value other than publicly traded stocks, bonds and cash.

Real estate has fought its way out of the “alternative investment” silo. Over the last 30 years investors of all stripes have realized real estate is a critical component of any portfolio. A large part of the reason for this is that it has only been within this time period that equity ownership in real estate has become widely available in a “securitized” form such as REIT shares or in an ownership of “units” in a closed or opened fund. Real estate is no longer a niche play but now available to the masses. As John notes, the primary reason is its lack of correlation to publicly traded stocks and bonds. Real estate has proven to anchor investment portfolios in what have been withering moments in our public trading markets.

Investment advisors will commonly recommend that a person’s portfolio have between 10% and 20% in real estate. It is generally thought that investors who are risk-averse would tend to hold a mix with more real estate and less risk-averse investors would tend to weigh stocks more heavily in their portfolio. What is evolving today is that the less risk-averse investor should actually be the one weighing their portfolio more favourably toward real estate than otherwise as real estate is such a strong non-correlated asset class to the hoped for “high flyers” to which so many less risk-averse investors are attracted.

Real estate investment product generally comes in two flavours: public and private. Public real estate investment product is well known in Canada by our publicly traded real estate investment trusts (REITs) like RioCan, Chartwell, CREIT, Dream, Boardwalk, Slate Office, etc. Private real estate product is less well known but is now within reach of the average investor. There are private REITs where the asset managers have congregated select properties to securitize revenue streams for their clients. Private real estate includes holding properties directly, holding interests through mortgages, or through holding units of partnerships and funds that hold mortgages. Fundscraper, for example, is a platform for distributing private real estate investment product.

Both provide diversification benefits to a pure stock and bond portfolio and there are advantages and disadvantages of each. For example, a public REIT is more liquid than private real estate but the investor does not have control over decisions as to when to sell individual properties as he or she would by owning properties instead of stocks. There is also the risk that a public REIT will not have sufficient inverse correlation to the other elements of the investment portfolio if the investment portfolio is only made up of publicly traded securities. The portfolio may be made up of stocks, bonds and REITs, but they are all running on the same track! For example, public REITs have done well year-to-date this year as have the equity markets generally. CIBC’s Canadian REIT Monthly Report for April 3rd, 2019 points out that “Year to date (through March 26), Canadian REITs have delivered +13.5% on a total return … compared to the S&P/TSX Composite Index’s total return of +12.9%”. These two ponies are not only on the same track, but they are neck-and-neck!

As it is often said, nothing is more secure than the ground you’re standing on! Private real estate is a different track. For investors serious about diversification and intent on anchoring their portfolio to weather any storm, private real estate investment is critical. Private real estate investment is patient investment – investment dollars are tied up for extended periods. This is not an investment for people who may need to liquefy their holdings on short notice. These investments are tied for years. The return for the private real estate investor though is a significantly higher return, normally in the order of 20%+. It has the necessary inverse correlation to balance a basket of publicly traded securities. If you are an adventuresome investor, then it is imperative you knit a safety net of private real estate investment in case the high flyers come tumbling down.

Today, private real estate investment is within everyone’s reach. Learn how by signing up at https://my.fundscraper.com/signup.

ABOUT THE AUTHOR

Gregory Colford
Gregory Colford

PRINCIPAL BROKER, EXECUTIVE VICE-PRESIDENT & CHIEF COMPLIANCE OFFICER

Gregory Colford, JD, CIM, was a senior partner at Heenan Blaikie LLP, once one of Canada’s ten largest law firms. Over his 12 years at Heenan Blaikie LLP, he headed the Toronto Securities Department, the Corporate Services Department, the Precedent Committee, the Legal Opinion Precedent Committee, and was the Toronto representative on the firm’s Stock Trading Committee. Through the course of his practice, he brought many companies to the public capital markets and advised extensively on corporate governance, board integrity, and market compliance.  He was also the co-founder of Carlisle Capital Structures Corporation and helped the company grow to over $1 billion CAD in AUM of mortgage securities on behalf of a top tier Ontario pension fund.