Why We Include Real Estate In Investment Portfolios

We construct portfolios out of various asset types in order to diversify or spread out our risk. To spread risk we choose multiple asset types of differing profiles. Most often these asset types include domestic equities (US-based stocks) and domestic fixed income (US-based bonds), which provide for basic diversification. Then, we include additional asset types in order to achieve further diversification. Examples of additional asset types include commodities, foreign equities, foreign-denominated bonds, and real estate.

It is important to keep in mind as we review various asset classes for inclusion in our portfolio, that we must achieve appropriate return for the inherent risk associated with the specific asset class in question.

Why Include Real Estate?

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It is for that very reason that we choose to include real estate as a component of the well-rounded portfolio: due to real estate’s ability as an asset class to deliver a greater reward-to-risk ratio than most any other asset class. This goes, in general, for both personally-owned real estate and real estate owned via Real Estate Investment Trusts (REITs). REITs are like a mutual fund of real estate holdings, primarily commercial real estate holdings.

During periods of high inflation (as we may experience again soon), residential real estate has always provided a good hedge against rising inflation – even in times when some residential real estate loses value.  The fact remains that, although at times many folks have been hit and hit hard devaluation of real estate, present value of real estate is generally expected to appreciate at a greater pace than inflation in the long run.  On the downside, commercial real estate doesn’t always share residential real estate’s inflation-hedge benefits.

Global commercial real estate tends to provide the opportunity to benefit from currency gains when domestic inflation is higher than that of the countries that you (or your REIT) hold property in.  This is a similar benefit to owning foreign-currency bonds.

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