According to a Morgan Stanley Wealth Management Investor Pulse (December 2013) survey of 300 millionaires, 77 percent indicated they owned real estate as an alternative investment – more than double the next closest choice of alternative investments.¹ With so many investment options these days, real estate remains the investment of choice for several reasons:
Hard Asset
Real estate is classified as a “hard” or “real” asset, meaning that it is tangible. Like other physical assets such as gold or oil, real estate is a commodity with a limited supply. Because hard assets can be used to produce other goods or services, there is some assurance that they will retain a degree of value even in economic downtimes. However, unlike gold or oil, which generally must be sold or used in order to recognize value, real estate is unique in that it may produce current income to an investor while maintaining ownership of the asset.
Hard assets contrast to “financial” assets such as stocks and bonds whose value is derived from a claim of payment. In order to have a recognizable value, a financial asset must have a functioning underlying company, institution or financial system. In situations where a company fails (for example, Enron), an investment manager misappropriates funds (think Bernie Madoff), or an institution becomes insolvent (such as Lehman Brothers), an investor could be left with little to no residual value from the financial asset.
Inflation Hedge
Historically, commercial real estate has outpaced inflation and served as an effective inflation hedge in both high- and low-interest rate environments. In fact, since the National Council of Real Estate Investment Fiduciaries (NCREIF) began tracking private commercial real estate returns in 1978, the NCREIF Property Index (NPI) has exceeded inflation in 32 of 38 years.
1 Investments through the Realized Marketplace are typically offered as private securities in a special purpose vehicle. Although the securities may have a similar performance as a direct investment, such securities may have additional fees that a direct investment would not.
Relative Performance
Although some asset classes have demonstrated higher returns than real estate, these higher returns often come hand-in-hand with elevated risk. When volatility, or return per unit of risk, is taken into account, real estate exhibits superior risk-adjusted returns compared to other major asset classes such as stocks and bonds. This holds true across a variety of holding periods. In the chart below, the higher the number, the higher the average annual return relative to the risk of those returns.
| Risk to Return Ratio* | |||
| Time Frame | Real Estate | Stocks | Bonds |
| 10 Years | 0.80 | 0.37 | 0.45 |
| 20 Years | 1.06 | 0.43 | 0.60 |
| 30 Years | 0.85 | 0.60 | 0.71 |
| 35 Years | 1.11 | 0.65 | 0.78 |
*As measured by geometric average returns divided by standard deviation. The higher the ratio, the greater average annual percentage return relative to volatility (standard deviation). Data: NCREIF Property Index (real estate), S&P 500 (stocks), 10-year US Treasuries (bonds)
Portfolio Diversification
Investment portfolios that include real estate exhibit lower levels of risk* for given rates of return compared to traditional portfolios comprised of only stocks and bonds. Because returns of different assets move at different times and rates, investing in assets with low or negative correlation can create more consistent returns and improve overall portfolio performance. Since its inception in 1978, the NCREIF Property Index has exhibited a low or negative correlation with other major asset classes such as stocks and bonds - meaning adding real estate to an investment portfolio has the potential to increase returns and/or decrease risk compared to a portfolio of only stocks and bonds.
Correlation of Annual Returns (1978-2015)**
| Real Estate | Stocks | Bonds | |
| Real Estate | 1.00 | 0.12 | -0.4 |
| Stocks | 0.12 | 1.00 | -0.06 |
| Bonds | -0.04 | -0.06 | 1.0 |
* As measured by standard deviation in returns.
** Data: NCREIF Property Index (real estate), S&P 500 (stocks), 10-year US Treasuries (bonds)
Real estate investments may provide a variety a benefits as described above. However, like all investments, real estate does have its risks and investors investors should conduct their own analysis and due diligence prior to making investments. To view a variety of passive, institutional-grade, 1031 exchange-qualified real estate investments, visit the Realized Marketplace.