Download The Benefits of Diversification with Real Estate

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The Benefits of Diversification with Real Estate
Balance and diversification are the hallmarks of a strong
investment portfolio. Specifically allocating a portion
of an investment portfolio to a long-term investment in
commercial real estate can help diversify a portfolio of
stocks and bonds and smooth risk. This type of investment
may also provide an income stream and hedge against
inflation. Take a deeper look at the benefits of investing in
commercial real estate below.
Real Estate Investment Opportunities: Commercial real
estate has its place in a well-balanced investment portfolio.
Investors who might not be able to purchase commercial
property on their own can invest in real estate investment
trusts (REITs), limited partnerships, real estate mutual funds
or exchange-traded funds. As an illustration of its unique
benefits, institutional investors such as pension funds and
endowments regularly allocate 10 to 12 percent of their
investment portfolio to real estate.
Portfolio Diversification: Additional layers of
diversification can come from the real estate portfolio itself,
if it is diversified by property type, location, tenant, industry
and/or lease term. Because most real estate markets are
cyclical in nature, this type of investment strategy may
allow owners of and investors in commercial real estate to
more effectively deploy capital into sectors and locations
where the underlying investment fundamentals are relatively
strong and away from sectors where the fundamentals
are relatively weak. This type of diversification may also
offer investors significant benefits given the level of risk
relative to a portfolio concentrated on one property sector
or properties located in one geographical area. Over
time, this can help smooth risk and increase returns on a
portfolio. However, there is no assurance that a diversified
portfolio will be created or that such a portfolio will provide
greater benefits to stockholders than a portfolio that is
more concentrated in any particular individual real estate
investment sector or location.
Income: The leasing of high-quality commercial real
estate is generally designed with the objective of providing
investors with a recurring stream of income, since longterm leases, which are typical in many commercial real
estate sectors, may provide predictable cash flow. Another
way that an investment in commercial real estate may
provide income is through specific investment vehicles. A
popular one is the REIT. Since REITs must pay at least 90
percent of their REIT taxable income to stockholders in the
form of distributions on an annual basis, they potentially
provide a consistent stream of income. Distributions are
typically paid on a monthly or quarterly basis. The actual
amount and timing of distributions is not guaranteed and
depends on the amount of funds available. There is no
assurance that a recurring income stream will be generated
or will continue, and there can be no guarantee that these
objectives can be met.
Potential Hedge Against Inflation: As prices of goods
and services increase in the broader economy, real estate
can benefit. Rental increases are generally built into
long-term leases in the retail, office and industrial sectors.
Percentage rent increases are common in retail leases,
whereby property owners receive an increase in rental
income when a retailer reaches a certain threshold in sales.
The multifamily sector can adjust rents when leases expire,
typically on an annual basis. And hotels have the flexibility
to change their “leases” (i.e., their rates) on a daily basis.
Investors in real estate can also benefit from the increase
in property value that may occur over time. There is no
assurance that rental increases will occur.
Investors should consider their allocation in real estate
a long-term investment, in which they do not require
immediate liquidity. Over the long term, they may
generate income and experience moderate growth in their
investment.
For Broker Dealer Use Only. The views expressed herein are subject to change based upon economic, real estate and other market conditions. These views should not be relied upon for investment advice. This is neither an
offer to sell nor a solicitation of an offer to buy any security, which can be made only by a prospectus which has been filed or registered with appropriate state and federal regulatory agencies and sold only by broker dealers
authorized to do so. The Inland name and logo are registered trademarks being used under license.
Investing in real estate involves significant risk and is not suitable for all investors. The risks that could impact the value of an investment in real estate include, but are not limited to: local property supply and demand
conditions; tenants’ inability to pay rent; tenant turnover; inflation and other increases in operating costs; adverse changes in laws and regulations; relative illiquidity of real estate investments; changing market demographics;
acts of God such as earthquakes, floods or other uninsured losses; interest rate fluctuations; and availability of financing.
Any forward-looking statements are based on information currently available to us and are subject to a number of known and unknown risks, uncertainties and factors which may cause actual results, performance or
achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements.
This material has been prepared by Inland Real Estate Investment Corporation.