Within the investment arena, real estate is widely perceived as an alternative asset class relative to stocks and bonds. However, investors are quick to acknowledge the importance of real estate in their portfolios for the following reasons:
- Diversification – Allocating risk across various asset classes reduces the impact of market fluctuations. In particular, real estate has shown an inverse relationship with the S&P 500.
- Inflation Hedge – Real estate asset owners have the opportunity to hedge against inflation. In a deflationary environment where bond yields are compressed, the cost of capital is also decreased, allowing for financial structuring to increase cash flow and returns on the assets. In the contrary, during periods of inflation, investors will be able to take advantage of rental rate increases which may outpace the fixed cost of capital associated with debt on a property.
- Low Volatility – The real estate asset class provides more consistent returns than other asset classes with relatively low volatility.
- Predictable cash flow – Lease terms and favourable rental rates provide predictable cash flow on well managed real estate investments
- Control – Ownership of real estate assets allows investors a significantly greater amount of control over the investment strategy for the assets, their performance and their returns when compared to other asset classes
Historically, a diversified investment strategy which includes real estate and other alternative assets classes has been adopted by institutional investors. However, as more and more families embrace this approach, BGI intends to exemplify the major advantages of this “institutionalization” for the benefit of our clients.