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Dive into the risk/return levels for different real estate strategies and how they fit in portfolios.
Key Takeaways
- Kate Richard, co-founder, CIO and CEO of Warwick Investments emphasizes that the most important question investors must ask themselves when investing in real estate is what role they want it to play in their portfolio
- For investors looking to supplement income portfolios, core and core plus real estate is a good option. These strategies have bond-like return profiles and yield 4-5% in prime locations (higher in others).
- For investors looking to supplement growth portfolios, riskier strategies like opportunistic investment (which requires development) can generate high teen to mid-twenties returns but with higher risk.
- By combining exposures across the real estate risk spectrum, investors can create diverse exposures (and so some have up to 20% in real estate alone).
Transcript
My name is Kate Richard and I am the founder, CEO, and CIO of Warwick Investment Group. The question that people have to ask and do a little bit of soul searching on is what role am I asking real estate to hold in my portfolio? And I would say there's kind of two branches of answers to that question. The first is I'm expecting real estate to provide stable, diversified income stream. So this would provide diversification to my bond income, for example, or am I asking real estate to compete with private equity, growth equity and tech?
If I have a big bond portfolio, but I'm trying to shift out of my bonds, whether public or private, into income-generating assets, but that provide me diversification, those investors are going to be targeting core and core plus real estate in terms of risk. Those are going to be stabilized assets likely in good locations. And those yields for the most prime residential, for example, will be four to five percent in the top cities in the world. That same type of situation for really core commercial office and cities like London, Paris, New York, San Francisco, that is going to be the type of product that those investors gravitate towards.
If instead, like many university endowments and foundations, today I'm asking real estate to compete with private equity. Those are going to be opportunistic funds. We're going to be needing to see net returns in the high teens, low 20s, mid 20s. You're going to be pushing your returns target at that point. And so that's going to lead me into projects that are value-added, that are consolidation, new build projects, projects. We are taking a lot more risk to generate a higher return. And they may they may be more levered.
We see people with seven percent allocations all the way up through 20 percent allocations. And so you can see how you could get to 20 percent of a private portfolio being real estate. If you're investing in those two different types of assets, one is lower risk and one is higher risk.
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