Finding the best approach to real estate investing

With pension funds and other institutional investors constantly looking for capital appreciation and long-term growth opportunities, real estate is a recent hot trend that’s seeing a flood of capital. What’s driving the activity?

“Real estate is a cyclical business,” said Derek Warren, assistant vice president at Lincluden, during Benefits Canada’s 2015 DB Investment Forum in Toronto on Dec. 11. “It has corrected and will correct. But year over year, [investors] can count on the stability of the income it provides as an asset class,” he added.

Compared to bonds and equities, real estate has maintained an upward trajectory over the last four decade even though it’s relatively expensive in today’s market.

Over that same time period, the growth has been consistent at the 2 to 5% range per quarter, which is attractive to investors of a buy-and-hold portfolio. Warren noted real estate works as a hedge against inflation. “If the economy is improving, inflation is rising and yes, interest rates are rising but so are rents.”

According to Warren, after accounting for the cyclical nature of real estate, he recommends an allocation of about 10% in real estate. Investors can further reduce overall volatility by including a portion of real estate investment trusts that add liquidity, income and diversification. “There is no right answer. . . . You have to understand how real estate will marry into your fund,” said Warren.

Plan sponsors can consider direct ownership, although scale can be an impediment for smaller investors. Fund investment is also an option. Open-end funds provide diversity, management and liquidity. Closed-end funds aren’t an income play, said Warren, but returns will come at the back end with improvements to properties. Real estate investment trusts are highly liquid and can invest globally.

The bottom line is that investors need to look at the needs of the fund itself and the kind of liquidity they require, said Warren. “You need to figure out what your needs are going to be. Don’t be subdued by low volatility metrics,” he said.

All the articles from the event can be found in our special section: 2015 DB Investment Forum coverage.