Alternative Investments: The Case for Real Estate

Global central banks have raised interest rates to grapple with reemergent inflation, causing bond and equity valuations to decline in synchrony. The historical diversification benefits of traditional stock and bond investments has turned on end. Amid a continued challenging overall environment, we believe many investors will need a more sophisticated toolbox to meet their long-term goals.

In this environment, we believe alternative investments can be used as multi-faceted tools for portfolio construction. Alternative investments, defined as private equity, private credit, real assets—such as real estate and real estate investment trust (REITs)—and hedge funds, have the potential to provide investors with higher returns, higher income, lower volatility and diversification benefits relative to traditional investments.1 Consequently, they can be employed to enhance potential growth, income, defensiveness and/or to provide a hedge against inflation.

Benefits of investing in real estate

Real assets are tangible, physical assets whose value is derived from their physical use—which includes infrastructure, natural resources and real estate. Of these, real estate is the largest segment of real assets,2 representing a diverse set of opportunities across both categories of use and geography. Real estate has historically been a source of growth and income, diversification and a hedge against inflation. Investors can access real estate in one of three ways: through allocation into publicly traded REIT stocks, unlisted real estate funds or direct assets. Real estate has historically delivered returns on par with equities, with REITs modestly outperforming unlisted real-estate funds (see chart below).

In addition to its historically compelling return profile, real estate has typically offered yields above those of broad stock indexes as well as sovereign debt and high-grade municipal and corporate bonds over full market cycles.3 Real estate cash flows and values have also typically increased over time as the cost of marginal new supply rose and created a natural linkage to the rate of inflation.4 Consequently, real estate has tended to both sustain value relatively well during recessions and perform admirably amid heightened inflation.5