IS REAL ESTATE THE SECRET TO DIVERSIFICATION?

As the pandemic subsides and markets re-balance, Flora Harley highlights the enduring importance of property in a diverse investment portfolio

As part of The Wealth Report 2021, Knight Frank surveyed more than 600 private bankers, wealth advisors and family offices across 50 countries and territories to find out what the key factors behind wealth growth and resilience were during 2020.

The respondents, representing a combined wealth of more than US$3.3 trillion, picked three clear winners: diversification, equity and property market performance. In an environment of volatile share prices and lower yielding bond markets, it is clear a diverse range of property investments is an integral part of an intelligent investment portfolio.

Real estate offers diversification in many ways. Buildings can offer exposure to a wide range of industries, from technology to healthcare. They are spread across geographies and increasingly offer exposure to different demographics - particularly purpose-built rental blocks catering to young graduates or older renters seeking tailored care facilities.

This is attractive to wealthy investors who - eager to leave a legacy - take a multi-decade view of wealth management strategies. Direct real estate generally exhibits lower volatility of returns, in part due to how assets are valued and the lower frequency of trading compared to stocks and shares.

The performance of a range of property sectors during the pandemic illustrates the enduring resilience of bricks and mortar investing. Prices in prime residential markets grew on average by 1.9% during 2020, according to The Wealth Report 2021. Prices are likely to climb another 2% in 2021, according to our forecasts. Total returns in the residential sector – a measure including any income and appreciation - stood at 5.8% for the year.

Real estate offers diversification in many ways. Buildings can offer exposure to a wide range of industries, from technology to healthcare

The industrial sector, buoyed by a surge in e-commerce, posted total returns of 4.3%. Offices posted total returns of 0.9%, despite the boom in remote working. Only the retail sector, which suffers from longer-term structural challenges, posted negative total returns of -12% for the year.

Equities were also selected by our respondents as a key theme fuelling the growth of wealth. The S&P 500 posted a total return of 18% for 2020 despite a precipitous 30% fall in value during March 2020. The majority of these gains were driven by a small number of technology companies. A broader recovery took hold at the beginning of 2021.

Despite blockbuster returns, equities aren’t for the faint hearted and often form part of a broader portfolio for wealthy investors. The VIX index, a gauge of investor fears of near-term volatility, peaked at around 85 early in the pandemic – levels not seen since the Global Financial Crisis in 2007. By April 2021 as the vaccination roll-out gathered steam, the index subsided to pre-pandemic levels.

How investors balance these risks will depend on personal preference and risk appetite. Most diverse portfolios will, however, have some mixture of real estate at their core for its ability to capitalise on a range of post-pandemic trends, from remote working and the expansion of e-commerce to healthcare and automation. It is for these reasons that we expect the amount of capital targeting income-producing real estate, in the most liquid global centres, to swell throughout 2021 and beyond.


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Architecture After Recession