Has Your Real Estate Allocation Performed as it Should in the Downturn?

As the third largest asset class in the world, and one that has historically been uncorrelated to stocks and bonds, we believe that real estate deserves a position in most investor portfolios. Moreover, most advisors know the diversification benefits of commercial real estate, which explains why an estimated 145 million households are invested in REIT stocks. 

But when considering an allocation to real estate, you must select from a dizzying array of investment structures and strategies, which could make it challenging to solve for your client’s investment objectives. This discussion will help clarify your commercial real estate investment options and introduce a private real estate strategy you may find compelling.

A Sizable Market Deserves a Sizable Allocation

A 2021 study by NARIET, the voice of the public REIT industry, estimates the value of the U.S. commercial real estate market at $20.7 trillion. That’s over half the size of the U.S. stock and bond markets, and the reason this asset class cannot be ignored by advisors striving to construct broadly diversified portfolios. 

Interestingly, we often find that advisors who use real estate in their portfolio construction allocate only a small amount – usually 5% or less. However, considering real estate’s low correlation to stocks and bonds and its potential ability to enhance risk-adjusted returns, a percentage of 10% or more could make sense to have an impact on overall portfolio performance. 

Of course, real estate investments are subject to risk as are other investments. Some of those risks include interest rate and property value fluctuations, and risks associated with general and economic conditions. So, it’s important that your clients evaluate both the potential benefits and risks when considering a portfolio real estate allocation.

Public or Private

One consideration when evaluating commercial real estate investments for your clients is whether publicly-traded or private investment strategies are more appropriate. Each approach has advantages and limitations.

For example, public real estate securities are more accessible to buy and sell and available in many different structures, including REITs, actively-traded real estate mutual funds, index funds, and ETFs. Highly liquid, these public securities can benefit investors when markets rise due to their inherent equity beta. However, correlations can converge during periods of market stress, and liquidity can exacerbate volatility.

From our experience, we have seen that advisors often prefer public real estate investments because they are easily accessible, and index funds and ETFs can be low-cost options for owning the asset class.

On the other hand, many advisors view private real estate investments as a mystery that historically has been the domain of institutional investors and family offices. High general partner fees, limited liquidity, K1 tax reporting requirements, and lack of project transparency are issues that have kept many advisors from pursuing private options for their clients.

Yet, private real estate may offer benefits that can help you meet client objectives where stock and bond investments cannot. For example, a “core” private real estate investment strategy may be a durable source of alternative income and total return over extended periods expressed here by the NFI-ODCE index.

Private Real Estate Annualized Gross Total Returns & Income Q2 2012 to Q1 2022 

Source: IDR, NFI-ODCE.  Past performance is no guarantee of future results.

Also, private real estate has historically held up well during inflationary periods compared to other asset classes. And perhaps there is no more timely illustration of how private real estate can help hedge against inflation than how it has performed since the onset of the pandemic as shown below by the NFI-ODCE index.

How Asset Classes Have Performed in Today’s High Inflation

Sources: Bloomberg LP, Accordant Investments Indices: Intermediate U.S. Corporate Bonds are Barclays Intermediate Corporate Bond Total Return Index; S&P 500 is represented by the S&P 500 Index; REITs refer to public REITs and are represented by the FTSE NAREIT All Equity Index; Private real estate is represented by the NCREIF ODCE Index; Gold is represented by the Gold U.S. Dollar Spot Price Index. This represents historical patterns utilizing varying analytical data. It is not representative of a projection of any specific investment.  An investor cannot invest directly in an index. Accordant Investments does not expect NFI-ODCE to continue to deliver this type of outperformance. Past performance is no guarantee of future results.

Simplified Access to Private Real Estate

While the NFI-ODCE index has served institutional investors as a performance benchmark for over forty years, it cannot be invested in directly. Fortunately, private real estate index investing is now possible for your accredited investor clients. 

After years of development and receiving patent protection for its investment methodology, IDR Investment Management (IDR), a subsidiary of Accordant Investments and a registered investment advisor with $4.3 billion in AUM, created a fund that replicates and tracks the holdings of NFI-ODCE index with exceptionally low tracking error.

Today, through the IDR ODCE Index Fund LTD, your clients now have access to private real estate through a broadly diversified portfolio of institutional quality properties in a fund structure that provides:

• Lower fees than traditional private real estate investments
• Quarterly redemption windows for investor liquidity*
• Investment transparency of underlying index fund performance 
• Simplified subscription process and 1099 taxation

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Important Disclosures:

*While the Fund intends to “conduct quarterly redemption windows for investor liquidity" - The Fund is not required to do so and the Board may suspend or terminate the share repurchase program at any time. Redemption Shares may also be subject to a number of further significant limitations.

The information contained in this Presentation is for informational purposes only and is not an offer to sell, or a solicitation of an offer to buy, an interest (“Interest”) in a fund or other investment vehicle (collectively as applicable, a "Fund") by IDR Investment Management, LLC,  (“IDR IM”) or their affiliates and subsidiaries. 

The information contained herein is subject to change, and may not be reproduced, used or disclosed, in whole or in part, without the prior written consent of IDR-IM.

Statements contained herein are not historical facts are based on current expectations, estimates, projections, opinions and beliefs of the Firm. Such statements involve known and unknown risks, uncertainties and other factors, and you should not place undue reliance on them. Additionally, “forward-looking statements” may be referenced. Actual events or results or the actual performance may differ materially from those reflected or contemplated in such forward-looking statements.

Certain economic and market information has been obtained from published sources prepared by third parties and in certain cases has not been updated through the date of the Presentation. Neither IDR-IM nor their respective affiliates nor any of their respective employees or agents assumes any responsibility for the accuracy or completeness of such information. The IDR Entities have not made any representation or warranty, express or implied, with respect to the fairness, correctness, accuracy, reasonableness or completeness of any of the information contained herein (including but not limited to information obtained from third parties), and they expressly disclaim any responsibility or liability for this information. IDR-IM and the IDR Entities do not have any responsibility to update or correct any of the information provided herein.

Investment in the Fund involves a high degree of risk and, therefore, is suitable only for sophisticated investors for whom such an investment is not a complete investment program and who are capable of evaluating the risks of the Fund and bearing the risks it represents.