How Much Of Your Portfolio Should Be In Real Estate?

There are many factors to consider when determining how much of your portfolio should be allocated in real estate.

Allocation Influencing Factors

The ultimate decision for an individual on how much to invest in real estate will depend on factors such as:

·      the amount of capital available to invest;

·      what percentage of the person’s net worth this represents;

·      the investment objectives, i.e. to produce income or long term appreciation;

·      liquidity requirements;

·      risk tolerance;

·      age of investor (proximity to retirement age);

·      investment time horizons

Another important factor that influences optimal portfolio allocations is research and insight provided by leading research universities.  Overall, the consensus of research is that investors get a better risk/return profile from owning real estate, although preferred allocation percentages tend to vary between researchers.

High Net Worth Investors

Aside from institutional investors, high net worth (“HNW”) individual investors are an important demand driver for real estate investment.  Many HNW investors can invest alongside sponsors or co-investors.  They can focus on properties which may be too small for institutional investors or where the institution cannot quickly transact.  Properties $5-$50M typically fall into this category “middle market real estate”. 

HNWs can identify mismanaged or mispriced real estate and capitalize on market inefficiencies to meet their return expectations which may be well above those sought by institutional managers. 

A recent survey by Tiger 21, a membership organization of HNW entrepreneurs, investors, and executives (net worth $25M+) found that real estate investment was one of the top allocations among its members, with an average of 25% of their portfolios.

Furthermore, the survey shows that as wealth increases, investors allocate heavily to non-liquid alternatives, with the average respondent having a total of 55% of their portfolio in private equity and real estate.  Liquid investments tend to be less of a priority for HNW investors.  Their preferences shift towards non-liquid alternative assets that offer low correlations to other investments, tax advantages, and higher potential returns due to their illiquidity (illiquidity premium). 

Below is the Breneman Capital recommended allocation based on net worth and need for liquidity.

Trends In Institutional Investing

It is interesting to examine fund allocation trends of institutional investors.  There is no “exact science” in determining investors’ optimal exposure to real estate—there are simply too many variables.

It is noteworthy that between 2001 and 2022, institutional investors’ aggregate investment allocation in real estate has steadily increased from 4.4% to 10.8% over these 22 years. 

One of the largest state employee pension funds in the word, the State of California Public Employees Retirement System (“CalPERS”), has increased its allocation of funds into real estate over the last 17 years.  Figures show an increase from 7% to 15% between 2006-2023.  Looking into 2023, 28% of institutions reported that they expect to increase target real estate allocations.  That is notable, and it is expected that institutions will have shifted their real estate allocation to 11.1% by the end of 2023.  

The overall expectation for institutional investors is that:

·      continued strong investment by defined benefit plans into real estate, meaning higher percentage allocation of funds;

·      new investment vehicles will be created for defined contribution plans;

·      there will be limited cap rate expansion in the event of any downturn;

·      demand will increase for larger real estate assets

Breneman Capital

Breneman Capital is a data-driven multifamily investment firm pushing the real estate industry into the future with a modern approach to direct real estate investments.

We focus on providing our investors with the best risk-adjusted investment opportunities in carefully selected markets across the U.S., researched and underwritten with extreme detail from our headquarters in Chicago.

The best part, Breneman Capital is your one-stop-shop for all your direct real estate investment needs.

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