The impact of real estate allocation on investors’ ability to generate real income

ABSTRACT

Endowments, wealthy families and retired individuals are often concerned, first and foremost, about preserving their wealth or avoiding the possibility of depleted funds during their lifetime. This paper examines the extent to which a variety of real estate asset types, in addition to a traditional stocks and bonds allocation, can help preserve wealth or avoid a financial shortfall event subject to periodic withdrawals over an extended time period. Using a Monte Carlo Simulation technique, we analyse the resiliency of eight different real estate investment vehicles as a rule of thumb of a 4% annual withdrawal. Our results show that some – in most cases meaningful – portfolio allocation to each of these investment vehicles reduces the chance of a financial shortfall over long-term horizons of 30 or 50 years. Similarly, when wealth preservation is desired, allocation to each of these investment vehicles increases investors’ wealth preservation probability. Overall, it appears that equity REITs provide the greatest benefit to the portfolio compared with other real estate investment vehicles. These findings support portfolio allocation into real estate vehicles for investors that seek to preserve wealth or avoid financial ruin.

KEYWORDS:

• Wealth preservation
• real estate investment
• portfolio management
• short-fall risk

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. We define an efficient investment portfolio as a portfolio that results in the highest probability of preserving wealth or the lowest probability of financial ruin.

2. Pagliari (2017) provides an overview about the optimal allocation to real estate within a diversified portfolio.

3. Time series data on CMBS, MBS and preferred REIT securities are only available from the year 2000. Time series data on developed REITs excluding the US is available from the year 1990. In order to eliminate the effect of higher rate of inflation during the earlier portion of the data, in our analysis we only utilise inflation-adjusted returns. A previous version of this paper includes the results of the analysis with data from the year 2000 and the results are qualitatively similar – pointing towards benefits from allocation to real estate investment vehicles.

4. The index includes only CMBS that are ERISA (Employee Retirement Income Security Act of 1974)

5. From a practical perspective, individuals that would like to imitate the performance of the NAREIT equity, NAREIT mortgage and NAREIT Developed Ex US indexes, may choose to invest in Vanguard Real Estate Index Fund ETF Shares (VNQ), iShares Mortgage Real Estate Capped ETF (REM) or Vanguard Global ex-U.S. Real Estate Index Fund ETF Shares (VNQI), respectively. Similarly, individuals that would like to imitate the performance of the Wells Fargo Hybrid and Preferred Securities REIT, Barclay Capital US CMBS and Barclay Capital US MBS indexes may choose to invest in InfraCap REIT Preferred ETF (PFFR), iShares CMBS ETF (CMBS) or Vanguard Mortgage-Backed Securities Index Fund ETF Shares (VMBS), respectively. Funds that are tied to the JLL daily NAV can be used to imitate the performance of the NCREIF Fund Index.

6. For robustness, we repeat the analysis using NCREIF’s NPI and NTI return series. The results using each of these alternative investment indices appear to be qualitatively similar to the results reported in this version of the paper, which employs the NFI-ODCE as the proxy for open-end real estate funds.

7. Since Zillow only provides average US rent prices from 2010, BLS data on changes in rents on primary residence is used to derive rent prices for the 1978 to 2010 time period.

8. We do not find series correlation with statistical significance for any of the investments within our dataset, with the exception of the NFI-ODCE return series. For this series the time series correlation is only significant for one period (year), which is the lag we use in our analysis.

9. We do not try to subject our investment portfolios to lower withdrawal rates because the results of our analysis with a 4% annual withdrawal rate already showed high probability for wealth preservation and avoidance of a financial shortfall event. Therefore, the benefit associated with the inclusion of any investment vehicles when lower withdrawal rates take place would be difficult to observe.

10. These results are available upon request from the authors.

11. Results with the inclusion of a specific real estate investment vehicle yield results that are qualitatively similar and are available from the authors upon request.

Additional information

Notes on contributors

Randy Anderson

Dr. Randy Anderson serves as President of Griffin Capital Asset Management Company and Chief Economist of Griffin Capital Company, LLC. In addition, Dr. Anderson serves as Chief Investment Officer of Griffin Capital Advisor, LLC, Executive Vice President, Secretary and Trustee of Griffin Institutional Access® Credit Fund and Portfolio Manager of Griffin Institutional Access® Real Estate Fund.

Previously, Dr. Anderson held several senior executive positions at Bluerock Real Estate LLC, including founding partner of the Bluerock Total Income + Real Estate Fund where he was the Portfolio Manager. Prior to Bluerock, Dr. Anderson was a founding partner of Franklin Square Capital Partners, the firm that pioneered the non-traded Business Development Company. Dr. Anderson also served as the Chief Economist and a Division President for CNL Real Estate Advisors, as the Chief Economist and Director of Research for the Marcus and Millichap Company where he served on the Investment Committee, and as Vice President of Research at Prudential Real Estate Advisors. Dr. Anderson also served as the Howard Phillips Eminent Scholar Chair and Professor of Real Estate at the University of Central Florida where he directed the research and education institute. Dr. Anderson was the former editor of the Journal of Real Estate Portfolio Management; was awarded the Counselors of Real Estate designation, named a Kinnard Young Scholar by the American Real Estate Society, and named both a NAIOP Research Foundation Distinguished Fellow and a Homer Hoyt Institute Fellow.

Dr. Anderson is also known for sharing his macroeconomic insights at investment industry events and in the media. He has provided economic commentary for prominent financial news outlets, most notably Bloomberg Radio, CNBC, TheStreet, and Fox Business News. Dr. Anderson has also been quoted in articles featured in Financial Advisor Magazine, GlobeSt.com, and National Real Estate Investor.

Eli Beracha

Dr. Eli Beracha is the director of the Hollo School of Real Estate at Florida International University, the associate director of publication for the American Real Estate Society and the co-editor of the Journal of Real Estate Literature. Since he received his doctorate from the University of Kansas in 2007 he has published over 40 academic papers in leading real estate and finance journals, which were presented in many national and international conferences, won ‘best paper’ awards and are regularly cited by the popular press. Recently, Dr. Beracha was awarded the Kinnard Scholar Award, which recognised him as an outstanding real estate scholar in an early stage of an academic career and was ranked #3 in the world (by the Journal of Real Estate Literature) for his real estate academic research productivity. In addition to Dr. Beracha’s scholarly work, he also has years of practical experience in the area of real estate investments and has served as a consultant for numerous real estate related projects.

Spencer Propper

Mr. Spencer Propper serves as Associate Portfolio Manager of Griffin Institutional Access Real Estate Fund. Additionally, Mr. Propper serves as Vice President, Product Development of Griffin Capital Company, LLC, a position he has held since joining Griffin Capital in 2014.

Previously, Mr. Propper was a Director at Lakemont Group, a boutique real estate investment banking and consulting firm. Within this role Mr. Propper provided portfolio management services to the Bluerock Total Income Plus Real Estate Fund. Additionally, at the Lakemont Group, Mr. Propper was responsible for overseeing projects for a variety of clients, including pension funds, private equity firms and publicly traded real estate companies and specialised in structured finance, market analysis and strategic due diligence.