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Is it a good time for investors to turn to private RE?

Oksana Patron1 August 2022
Man tripped by volatile markets

At times when the uncertainty continue to dominate the markets, after volatile first six months of the year, investors need to adjust to finding income opportunities “in many shapes and sizes”, with some in search of yield considering turning to traditionally private markets.

Historical precedence indicated that private real estate could effectively hedge inflation and become a steady income-producing asset, according to Clarion Partners.

Across the private real estate, investors should reconsider in particular their exposure to the industrial and multifamily segments merit.

“Our analysis of the structural shifts and path of innovation within the US economy currently lend to heightened opportunity within several segments of the market. The industrial and multifamily segments merit particular attention now; both have some of the strongest fundamentals on record and return performance, as well as strong pricing power,” Franklin Templeton’s Midyear Outlook said.

The report quoted an analysis of the 44-year history of the NCREIF Property Index performance under different economic scenarios which suggested that private real estate total returns were strong during the years of high/medium real GDP growth and high/medium inflation.

“The latest case in point was the 12-month period through the first quarter 2022, when the annual real GDP growth rate and core inflation rate were –1.5% and 6.4%, respectively, and the NCREIF Property Index returned a robust annual rate of 21.9%, also outpacing the S&P 500 Index at 15.7% and the Bloomberg Barclays US Aggregate Bond Index at –4.2%,” it said.

As far as other private real estate segments were concerned, the fund manager said it also favoured a few alternative property types such as life sciences, single-family rentals (SFRs) and self-storage.

On top of that, according to Shane Hurst from ClearBridge Investments, another asset class that could act as an inflation hedge were the infrastructure assets due to their ‘pre-programmed way’, through regulation and contracts, they could easily adjust to inflationary environments.

Other income opportunities could be found across higher-quality fixed income securities, particularly those with longer duration or more exposure to interest-rate increases, in corporate space with companies that had pricing power given the inflationary backdrop, bank loans, and high-quality, blue-chip companies which allowed for better dividend growth and stronger dividend resilience during difficult times.

 

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