Over the short term, stocks often move in the same direction. That’s great when the market is rallying, not so much when it’s in free fall. While having a diversified portfolio can help cushion the blow, the market’s overall correlation usually means most stocks still move in relative unison during periods of turmoil like we’ve seen recently.
However, the private real estate market functions much differently. The underlying values of commercial properties don’t move in unison with the stock market’s daily gyrations. Because of that, private real estate can be a great place for investors to consider if they want to reduce their portfolio’s overall volatility.
The advantages of private real estate
Real estate is the third-largest asset class behind the stock and bond markets. The U.S. commercial real estate market’s current value is around $21 trillion. While some real estate trades on public stock market exchanges — the current market capitalization of all publicly traded real estate investment trusts (REITs) is around $1.5 trillion — most commercial real estate is in private hands. Holders of private real estate include private equity funds, endowments, pension funds, non-traded REITs, and wealthy investors.
There’s a reason so many institutional and wealthy investors own private real estate. It has produced better returns with less volatility than the public stock and bond markets. Over the last 20 years, private real estate has been 71% less volatile than public REITs. Meanwhile, it has consistently distributed an attractive income yield that has historically outpaced listed REITs, bonds, and stocks.
Because of that, adding private real estate to a portfolio can help reduce its volatility while improving returns. For example, a traditional 60/40 portfolio mix between stocks and bonds has produced an average annual total return of 7.7% over the last two decades with 9.7% volatility. However, adding a 10% weighting to private real estate (and adjusting the remaining mix to 55% stocks and 35% bonds) has improved the average annual return to 8% while cutting volatility to 8.9%.
How to add some private real estate to your portfolio
Investors don’t have to buy a commercial building to invest in private real estate. Several top-tier private equity firms sponsor a non-traded REIT open to most individual investors. The biggest in the sector by far is Blackstone Real Estate Income Trust (BREIT), managed by leading alternative asset manager Blackstone Group (BX<…….