As we continue our private investment series, today we explore the real estate asset class and the merits it has in a portfolio.

Real estate has long been considered one of the cornerstones of wealth accumulation and preservation, particularly for high-net-worth (HNW) families. While many are familiar with traditional real estate investments, such as owning individual properties or participating in Real Estate Investment Trusts (REITs), private real estate offers a distinct opportunity to diversify beyond publicly traded markets and generate stable, long-term returns. Today’s post explores the advantages of private real estate investing, its role in a diversified portfolio, and the different avenues available for investors to access this asset class.

What is Private Real Estate?

Private real estate refers to investments in physical properties that are not publicly traded on an exchange. These investments include:

Commercial real estate: Office buildings, retail centers, warehouses, and industrial properties.

Residential real estate: Apartment complexes, multi-family homes, and other income-generating residential properties.

Specialty real estate: Data centers, medical facilities, and other niche property types.

Private real estate investments often involve direct ownership or participation in professionally managed funds, which seek to provide access to institutional-grade properties without the volatility of public markets.

Return Profile of Private Real Estate

Private real estate seeks to offer a steady, income-generating return profile, primarily through:

Rental income: Investors typically receive regular income streams from tenants, offering reliable cash flow.

Appreciation: Over time, properties typically appreciate, adding to the long-term capital gains component of returns.

Inflation hedge: Real estate often acts as a hedge against inflation since rents and property values can rise in inflationary periods.

Historically, private real estate has generated mid-single-digit annual income returns¹, supplemented by capital appreciation over time. The long-term horizon of private real estate provides an opportunity to compound returns, offering attractive risk-adjusted performance compared to public equities.

Low Correlation to Public Equities

One of the key benefits of private real estate is its low correlation to public equity markets. Unlike stocks, which are traded daily and subject to market sentiment, private real estate valuations are driven by property fundamentals (rents, occupancy rates), location-specific factors, long-term leases and property management strategies. As a result, private real estate tends to exhibit less volatility and acts as a stabilizing force in an investment portfolio. During periods of market turbulence, real estate can provide downside protection, reducing overall portfolio risk.

Diversification Benefits

Adding private real estate to an investor’s portfolio can introduce significant diversification benefits. While stocks and bonds are influenced by numerous macroeconomic factors, real estate performance is more closely tied to:

Local market dynamics: The strength of the regional economy, supply and demand in specific markets, and demographic trends.

Sector-specific drivers: Commercial real estate, for example, depends on business cycles, while residential properties are influenced by housing demand and rental trends.

Investing in different real estate sectors (commercial, residential, industrial) across multiple geographies can enhance diversification within the asset class itself. This multifaceted exposure reduces overall portfolio risk and increases the probability of generating consistent returns across economic cycles.

Why Private Real Estate May Fit Inside a Family’s Portfolio

For high-net-worth families, the appeal of private real estate goes beyond returns and diversification. It also aligns with their broader financial goals of capital preservation, income generation, and legacy building. The following are key reasons why high net worth families allocate to private real estate.

1. Wealth Preservation

Real estate’s tangible nature and intrinsic value make it a reliable store of wealth. Properties, particularly those in prime locations, tend to retain value over time and are less susceptible to market shocks than other asset classes.

2. Steady Income Stream

The predictable cash flows from rental income make real estate particularly appealing to families seeking stability in their portfolios. This income can be reinvested or used to meet ongoing financial needs.

3. Inflation Protection

As mentioned earlier, real estate provides a natural inflation hedge. Property values and rental income typically increase in line with inflation, protecting purchasing power over the long term.

4. Estate Planning & Legacy Creation

Private real estate can play a pivotal role in estate planning for high-net-worth families, as properties can be passed down to future generations.

How to Access Private Real Estate

There are several avenues through which investors can gain exposure to private real estate, each with varying degrees of involvement, risk, and return potential:

1. Direct Ownership

Investors can purchase properties outright and manage them directly. This requires significant capital and hands-on involvement but provides full control over the asset and its cash flows.

2. Private Real Estate Funds

For those seeking a more passive approach, private real estate funds pool capital from multiple investors to acquire and manage a diversified portfolio of properties. These funds are often managed by institutional-grade asset managers, providing professional expertise and access to high-quality real estate.

3. Real Estate Syndications

In a syndication, investors pool their capital to collectively purchase larger, often commercial, properties. A sponsor manages the investment, while limited partners (investors) provide the capital. Syndications offer access to deals that would typically be out of reach for individual investors.

4. Private REITs

Private Real Estate Investment Trusts (REITs) are similar to public REITs but are not traded on public exchanges. They offer investors liquidity through periodic redemption windows, along with exposure to a diversified portfolio of real estate assets.

5. Qualified Opportunity Zones

Investors can also explore Qualified Opportunity Zones, a program created by the U.S. government to spur economic development in designated areas. By investing in qualified real estate within these zones, investors may benefit from tax incentives and potential appreciation.

Conclusion

For high-net-worth families seeking long-term capital appreciation, income stability, and portfolio diversification, private real estate can be a compelling asset class. Its return profile, low correlation to public markets, and inflation protection make it a valuable component to a diversified portfolio. With multiple pathways to access private real estate, from direct ownership to professionally managed funds, investors can tailor their approach to meet their specific financial objectives.

At GatePass Capital, we are committed to helping our clients navigate the complexities of private real estate investing, ensuring that their portfolios are positioned for long-term success. If you'd like to explore how private real estate can enhance your portfolio, contact our team.

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Notes:

1 NCREIF (NPI), January 1, 2004 to December 31, 2023

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