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.
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.
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.
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.
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.
Download the full paper to learn five reasons why real estate diversification matters: