Investors continue to be interested in alternative investments. This seems to set up a conundrum – they don’t want to invest in rentals, but they do want new options. According to a new study by Fundrise, almost 75% of respondents said they were looking to explore investing in real estate and other alternative investments in the next few years. The answer to this question may be coming from an unlikely source: the real estate industry itself.
Investors may be feeling frustrated with alternative investment options of late: cryptocurrency is a non-starter and with mortgage rates on the rise, they may feel like real estate options are slim pickings. And with most renters complaining that their housing payments have increased considerably over the last two years, traditional alternative investments in rental properties may seem like a limited option. Can your clients use the increased mortgage rate (possibility of further increases) to their advantage? The answer may be in changing how your clients think about real estate.
First, the obvious hesitation in investing in real estate is not the increasing mortgage rate. It’s a worry that the pandemic real estate bubble may not have burst. “Prices are now 43% higher than they were at the start of the coronavirus pandemic, according to the S&P Case-Shiller national home price index.”[1] Concern over bubbles is legitimate. As we’ve said before: “Investment bubbles are hardly new or novel. Some are old as dirt. Literally. One of the most impressive bubbles involved the tulip trade, with a record sale of 99 lots of tulip bulbs in 1637. That lot went for approximately $3.5 million in today’s U.S. dollars. A similar sale of tulips prize tulips [2]would gain $700 today.” No client wants to be proverbially left holding the bag, whether that is a house that’s worth 40% less than its purchase price or a bag of tulips.
Second, a not as obvious concern about investing in real estate as an alternative investment may relate to the work involved in the upkeep of the property. Older clients may be hesitant about investing in rental properties which require maintenance and attention. The country continues to experience a shortage in both building materials and crucially in building professionals. Clients of any age may be concerned with keeping properties up to code.
When clients think of alternative investments, they usually are seeking investments that have different growth trajectories than their stock-based investments, allowing them to spread risk. We classify alternative investments into three main groups: Private Equity, an illiquid asset class that seeks long-term appreciation away from public markets; Hedge Funds, investments that have broad flexibility in the types of strategies they can employ to follow their stated investment objectives; and commodity Pools, enterprises that attract funds from people who are looking for pool managers to engage in commodity-related trades. [3]
One of the interesting elements of alternative investments is that they have an impact on communities. Private equity can drive entrepreneurship. That fact is of high interest to many clients – see the success of TV shows like Shark Tank for proof of that concept. Social impact has driven changes to stock market investing, so it might make sense that it may be spilling into alternative investments as well. There may be a real impact to communities if there is a lack of investing in real estate rentals. “However, despite being warned by everyone from mom and dad to big-name institutions to save every penny and “skip the latte” in order to boost savings and pay off student loan debt, economists are also warning that extreme saving can have troubling economic consequences with widespread adoption”[4] One impact of not investing in real estate rental properties by individuals, as opposed to larger corporations is that the rate of those rental properties escalates. “Blackstone, one of the biggest corporate landlords in the US, reported its highest earnings year on record on Jan. 27, largely on the strength of rising rents in its real estate portfolio. Blackstone reported $1.4 billion in net income in the fourth quarter, and $5.9 billion for the year, nearly six times what they made the previous year.”[5]
Yet, investors continue to be interested in alternative investments. This seems to set up a conundrum – they don’t want to invest in rentals, but they do want new options. According to a new study by Fundrise, almost 75% of respondents said they were looking to explore investing in real estate and other alternative investments in the next few years. The answer to this question may be coming from an unlikely source: the real estate industry itself.
Despite real estate, as an asset class, occupying the head of the class spot (it’s the largest asset class in the world), it has been slow to innovate. “That’s now changing. Digital technology, urbanization, the emphasis on sustainability, and affordable building are pushing the industry to evolve. The pandemic has also led to a widespread reconsideration of buying habits and of how and where people want to live and work—all of which have wide-ranging implications for the future of real estate.”[6] Changes to the real estate industry may provide new alternative investment options.
New options for investing in real estate include one drive by Gen Z. “I]nstead of one property owner holding all the profits, they are leveraging crowdfunding to allow more stakeholders to invest in their communities.”[7] These investments usually don’t fall into that concept of commodity pools we mentioned above as alternative investments.[8] But advisors may want to dig into the structure of these innovations in real estate, whether driven by the industry or by a concern for keeping rental payments at livable levels.
[1] https://www.cnbc.com/2022/09/09/housing-market-confusion-whats-happening-next.html
[2] https://www.bcgbenefits.com/blog/crytpo-currency
[3] https://www.bcgsecurities.com/resource-center/investment/alternative-investments-going-mainstream
[4] https://www.bcgbenefits.com/blog/early-retirement
[5] https://qz.com/2118625/corporate-landlords-are-benefiting-from-inflation
[6] https://www.bcg.com/industries/industrial-goods/real-estate
[8]“…Real estate investment trusts (“REITs”) that enter into swaps (including interest rate or currency swaps used solely for hedging purposes) will be holding “commodity interests,” and accordingly could be considered commodity pools under the CEA.” https://www.willkie.com/-/media/files/publications/2012/10/cftc-excludes-certain-securitization-vehicles-fr__/files/cftcexcludescertainsecuritizationvehiclespdf/fileattachment/cftc_excludes_certain_securitization_vehicles.pdf
These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.
Before leaping into the unknown, we recommend a thorough examination of your plan. Because we are experts in the field, we know the marketplace and know what your existing vendor is capable of offering. Through this examination, we can help you optimize the service you receive.
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