Real estate might need a renovation, but it's still a good diversifier

Like picking the right location, advisers much choose sectors carefully

Oct 3, 2011 @ 3:33 pm

By Lavonne Kuykendall

Investors are skittish about real estate investments due to the beating the sector took over the past few years, but alternative-investment managers say real estate has some features that make it worth another look.

That was the message from a panel of real estate investment managers at the Investment News Alternative Investments Conference in Chicago Monday.

Despite a bad drop in 2008, a real estate allocation can, over the long term, reduce portfolio volatility and add income, and, in many cases, offer non-correlation to the larger stock market.

But not always.

“Different product types behave very differently,” said panelist Jeffrey T. Hanson, president and chief executive officer of Grubb & Ellis Equity Advisors LLC.

Golf courses didn't do so well during the downturn and neither did office space. But health care facilities did very well.

Mr. Hanson said he considered health-care-related real estate to be the strongest sector.

“One component that differentiates it is, it is the one asset class that does not heavily depend on job growth,” said Mr. Hanson. “Another relates to demographic trends in our aging population.”

Other sectors have unique strengths, he said. Hotel and lodging can reprice its products quickly, and he sees a strong future for rental housing, due partly to the so-called echo boom generation and their propensity to make home purchases later in life than their baby boomer parents did.

Compared with a 60%/40% stock/bond portfolio, putting 10% of funds into real estate and another 10% to managed futures would have increased return and reduced volatility over the last 15 years, said Mark Goldbert, managing director of W.P. Carey & Co. LLC and president of Carey Financial LLC.

The conference was attended by more than 400 investment professionals.

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