Family Offices Turn to Private Real Estate’s Low Correlation and Diversification in Volatile Market

 

Family offices are increasingly turning to private real estate as a way to augment performance and help them in their consideration of today’s market volatility.

Indeed, private real estate is now more popular than ever. Family offices are realizing the value of an alternative investment with low correlation to the public market and many consider it a key portion to their alternative investment allocations. Based on historical performance, private real estate can be a potential hedge against inflation with a similar profile to bonds’ long holding period and illiquid structure.

MLG Capital tracks the performance of the stock market with publicly traded REITs and thoroughly compares the two with private real estate investments. The graph below reveals a 10-year history of how volatile the stock market (S&P 500, red line) and public REITs (IYR ETF, black line) are when compared to the widely accepted metric for tracking private real estate investments, the NCREIF (NCREIF property index, green line). It is easy to see the publicly traded investments are significantly more volatile than private real estate in this example. The graph below shows the returns of REITs and the S&P 500 are more correlated to each other than to private real estate. Too much correlation inside a portfolio, especially in volatile investments, could result in unnecessary risk. There may be more volatility to come and your portfolio’s now more than ever should be well positioned to manage any upcoming risk with diversified alternative’s.

(*The S&P 500 is the leading indicator of US Large Cap Equities. **The IYR ETF seeks to track the investment results of the Dow Jones US Real Estate Index, which measures the performance of the publicly traded real estate sector of the US equity market. ***NCREIF Property Index is a quarterly measure of the unleveraged composite total return for private commercial real estate properties held for investment purposes only.)

 

If properly managed, private real estate can offer a unique hedge to the public markets in its ability to be held through bear markets and weather volatility often seen throughout a market cycle; however, holding periods and the ability to hold will be directly proportionate with each individual asset’s business plan and debt strategy. Dependent on the asset manager, sunset dates or other fund provisions may trigger a liquidity event at an inopportune time. An asset manager like MLG Capital, for example, specifically does not tie itself to forced sunset dates nor liquidity timeframes for the benefit of being able to hold if need be. Furthermore, if a private real estate asset manager uses low to moderate leverage and strategic debt that is aligned to the overall business plan for the underlying asset, private real estate can be a great, consistent, and unique product for those seeking low correlation to the public markets.

With portfolio diversification top of mind, family offices constantly seek new ways to structure investments by account and asset type. Geographical diversity is most obvious; however, real estate investors can also diversify by asset type (apartments, retail, industrial, etc.), vintage (age of property), asset class (brand new class A to older class C), and operator (property manager/leasing agent). It is important to realize, however, that reaching this level of diversification takes a significant amount of capital, education, and time. One way to overcome these challenges is through investing in a fund which allows and, in a way, promotes this amount of diversification.

In addition to diversification and low public market correlation, the surge in popularity of private real estate utilizing a fund structure may be attributed to the time-consuming task of property management tasks related to operation, control, and oversight. Family offices often avoid managing their own assets unless they have the time, education and capital to effectively execute their business plan. Instead, they seek out competent third parties who specialize in generating value through long-term tenant and vendor relationships.

It’s important to note that family offices also appreciate the fact that real estate is local. The businesses, restaurants, tenants – even if nationally headquartered – have the power to positively or negatively affect their local market. Understanding a local market is no perfect science and contains no absolutes. Every market is different and evaluating local demand drives success.

In conclusion, private real estate performance of assets and related entities, similar to a company such as MLG Capital, have historically outperformed stocks and bonds.

MLG Capital is currently on its fourth fund, MLG Private Fund IV LLC*, a $200 million equity fund that is accepting new accredited investors. The series of MLG Private Funds were formed to acquire, directly or indirectly, a geographically diverse portfolio of real estate consisting of Multifamily, Industrial, Retail, Office, and other opportunistic opportunities located in strategically identified areas throughout the United States.

Since the inception of MLG Capital in 1987, the firm and its associated entities had active, exited or pending investments of approximately 15.5 million square feet of total space across the United States, inclusive of more than 11,250 apartment units, with exited and estimated current value exceeding $1.5 billion. MLG Capital’s series of funds target cash on cash yields, quarterly distributions, and appreciation over time to deliver consistent investor returns in the 13-15% net IRR range.

Past performance is never an indication of future results. As always be sure to complete your full due diligence on any investment. This is not an offer to sell a security or an interest in any offering being made by MLG Capital, or its affiliates and is intended to solely be a resource of thoughts, opinions, and materials to use in educational aspects of private commercial real estate investing.

To learn more about MLG Capital’s work with Family Offices, contact Rachele Voigt at rvoigt@mlgcapital.com.

 

*Offers to sell an interest in an offering of MLG Capital or affiliates will only be made to a qualified purchaser by the delivery of a confidential private placement memorandum and current supplements, accompanied by a subscription document booklet. Please reference confidential private placement memorandum and current supplements for full details of investment.