New products attract retail investors to private RE

Oksana Patron

10 November 2022

New products are attracting the interest of retail investors wanting to add private real estate of institutional quality to their portfolios, with multi-family and industrial sectors looking particularly engaging.

Thanh Bui, portfolio manager at Clarion Partners, who spoke on opportunities within real estate and the democratisation of alternative investments, in the latest edition of Franklin Templeton’s Megatrends Accelerate Webcast Series, said that previously, private real estate was really only available to institutional investors and high net worth individuals (HNWIs), leaving the average person to only gain access by buying publicly traded real estate investment trusts (REITs).

“But new products have come to market that provide access to private institutional quality commercial real estate to retail investors. Institutional quality private real estate refers to commercial real estate properties whose scale and complexity and balance sheet requirements meet the standards that are typically applied by institutional investors,” he added.

Commercial real estate offered a really large investible universe – about $11.2 trillion in terms of market size and private real estate represented about 89% of that. On average, in the U.S., institutional investors allocated about 11% to real estate.

“Investors view commercial real estate as a way to diversify their portfolios. Properties generally offer stable income in the form of contractual payments from rents and leases,” Bui said.

According to Clarion Partners, there were currently two sectors of commercial real estate that looked particularly and this included multifamily buildings, which performed differently from single-family for sale properties, and the industrial properties.

Bui said that the multifamily vacancy rate was just over 3% and that vacancy rate could not keep up with current supply demands.

“As a result of strong household formation trends, we have a housing shortage. Affordability, of course, remains a concern. But multi-family is a sector with a sliding scale – we have apartments that range from class A to B to C. As we see migration from high-cost urban centers to lower cost metro areas, this has a ripple effect to tertiary markets as people migrate to find more affordable housing.”

As far as the industrial sector was concerned, Bui said that nearshoring would help US commercial properties and the sector, which had already seen double-digit year-over-year rent increases and benefitted from e-commerce sales forecast to continue to grow 10% to 15% annually over the next couple of years, benefit from its proximity to the country’s southern border.

“And there’s this mini-trend called nearshoring, not to be confused with onshoring. It means that commercial properties in the US near the Mexican borders could benefit from this as well as other geographic areas that want to position their products near the U.S. borders.”

“There are a lot of headwinds in the broader economy but it’s not all bad. Commercial real estate has historically performed well in periods of inflation. There’s a low correlation between private real estate compared to stocks and bonds and publicly traded REITs.”