After six decades in the real estate business, Hines views diversification as of similar importance to cash flow, lease performance, and location, location, location because it is still not possible to reliably call market tops or bottoms. Without diversification, investors may increase their risk1 of being overweight in a poorly performing region, sector, or asset class.
Diversification Matters
Why consider a diversified real estate portfolio today?
After six decades in the real estate business, Hines views diversification as of similar importance to cash flow, lease performance, and location, location, location because it is still not possible to reliably call market tops or bottoms. Without diversification, investors may increase their risk1 of being overweight in a poorly performing region, sector, or asset class.
1.NCREIF and Hines Research, January 1, 1984 through December 31, 2022. As measured by the Sharpe Ratio – a financial calculation describing how much excess return is received for the extra volatility of holding a riskier asset.
Decades of Data Don't Lie
Decades of data show portfolio diversification reducing risk, but there are many ways to implement this strategy (by region, sector, market cap, style box, issuer, industry, credit quality, geography, asset type, etc.). Real estate is a complex system with thousands of variables capable of influencing outcomes. For us, true diversification must be regional, across sectors and asset classes, particularly given the risks inherent in the U.S. market - take a look:
Simmering unresolved issues (like stubborn inflation and rising interest rates) could still result in a prolonged recession. Given that both trailing transaction volume and price growth have fallen, investors may wish to carefully consider these indicators, along with other portfolio risks.
Professional Management May Assure Effective Diversification and Cushion Downside
Hines proprietary research data shows diversification across U.S. regions, sectors, and asset classes is best when combined. Real estate investing can be complex, but we believe professional management can provide smart diversification and downside protection.
2.The Leasing Environment Health Score measures the relative health of a market’s current Leasing Environment. It combines Vacancy rates, trailing annual rent growth and trailing annual demand growth into a composite score.
Overall, fundamentals are in a downtrend, but let's get granular. The health of all four major sectors have headed down, but only Multifamily has been in a steep, sustained decline.
However, taking a deeper dive into U.S. Multifamily, our research shows some markets have been reasonably good health (the left half of the plot above), which is completely at odds with the earlier graph. Still, downtrends can persist for years. One glaring example is the Office sector within the NCREIF Property Index, which (beginning with Q4 of 1990) fell every quarter for almost four years. The rebound, however, was equally dramatic, with Office delivering positive returns until running into the GFC in 2008Q4.
Another more recent example is how Retail fared in the early days of COVID. The NCREIF Retail subsector lost more than 15% of its value in just two years (2019Q2 through 2021Q1). Combining the precise capabilities of Hines Research with the insights of our local experts may reduce the risk of our investors getting caught on the wrong side of an unexpected trend.
Download the full paper to learn five reasons why real estate diversification matters:
Disclaimer
The content herein and in the report is provided for informational purposes only. Nothing above or in the report constitutes investment, legal, or tax advice or recommendations. Such content should not be relied upon as a basis for making an investment decision and is not an offer of advisory services or an offer to invest in any product or asset class. It should not be assumed that any investment in an asset class described herein will be profitable. Any projections, estimates, forecasts, targets, prospects and/or opinions expressed in these materials are subject to change without notice. Opinions or beliefs expressed in these materials may differ or be contrary to opinions expressed by others. Certain information above and in the report has been obtained from third-party sources. Hines has not independently verified such information.