5 Ways Real Estate May Provide Income And Diversification In A COVID-19 Recovery

By Ryan Strauser, Senior Vice President, Product Management for Black Creek Group

The market volatility experienced during the COVID-19 era has caused many individuals to alter their investment strategies in an attempt to generate consistent income and better diversify their portfolios. The pandemic triggered market volatility after an 11-year bull-market, leaving many investors searching for balanced investments.  As a result, investors are increasingly turning to real estate as a potential way to find balanced investments and mitigate risk.  

Potentially More Room for Real Estate 

In the U.S., investors have historically been – and continue to be – under-allocated to real estate. According to the Hodes Weill & Associates 2020 Institutional Real Estate Allocations Monitor, institutions, such as pensions, insurance companies and universities, allocate on average 10.6% of their portfolios to commercial real estate, which has continued to rise year-over-year as investor sentiment around the asset class remains solid. Meanwhile, other investors typically hold less than 1%, according to the 2018 Institutional Real Estate Allocations Monitor.   

Real estate may provide income and portfolio diversification for five key reasons. 

1.Cash Flow: 

Because real estate tenants are contractually obligated to pay rent each month, real estate investment firms typically have a monthly source of income.

2.Potential Inflation Benefits:

Commercial real estate leases often include rent escalations of 2% to 3% each year, which means that real estate has the potential to provide consistent positive returns. If present, these built-in rent increases can help real estate investments during inflationary periods. In addition to any annual rent increases that may be required under leases, rents in some markets appear to be increasing as COVID-19 has redefined where people choose to live and work in today’s virtual environment. 

3.Unique Investment Characteristics: 

Unlike other types of investment vehicles, real estate investment vehicles are unique in terms of the properties held in each portfolio. No two real estate investment companies can own the same building, which may provide more opportunities to meet a variety of risk profiles or to meet different investors’ needs.  

4.Asset Appreciation Potential:

Real estate managers have the opportunity to continuously enhance their assets in a way that many other investment managers cannot. For instance, real estate managers can secure additional tenants for their properties, enhance existing property amenities, or add new amenities to a given property, which can lead to an appreciation of the property value. 

5.Lower correlation with the stock market:

Private real estate typically has a low correlation (or has no correlation) to the stock market, meaning the value of the private real estate is not directly affected by stock market swings and volatility. Accordingly, adding real estate investments that are not listed on a stock exchange to a portfolio can provide additional diversification.

Considering Real Estate as an Income-Producing and Diversifying Complement to Today’s Portfolios  

As investors hunt for yield, they should consider an alternative investment like commercial real estate. There are many ways to invest in commercial real estate, and investors should carefully assess the different options with the help of a credentialed financial advisor to assess the risks and potential benefits. Ultimately, private real estate investments have the potential to provide long-term income and diversification for investors.