Although the global pandemic has taken a bite out of global wealth, high net worth individuals (HNWIs) appear poised to put more of their capital to work in commercial real estate.
The latest NREI research on HNWI commercial real estate activity shows that nearly 60 percent of survey respondents expect HWNIs to increase their allocations to commercial real estate over the next 12 months. Although views on allocations have been choppy over the past few years due to concerns about slowing economic growth, that figure is an uptick compared to 53 percent in the December survey who said allocations were likely to rise. It also sets a new high watermark in the five-year history of the survey. Nearly one-fourth of respondents (24 percent) expect allocations to remain the same, while a minority (9 percent) think allocations will decline.
NREI surveyed a cross-section of participants in July to gain insights into how allocations and strategies related to commercial real estate investment may have shifted in light of the global pandemic, which has tipped the U.S. economy into recession as well as contributing to stock market volatility and new record-low interest rates. Nearly one-third of survey respondents identified themselves as private equity investors, while the balance consisted of a mix of brokers, financial intermediaries and developers among others.
“What I believe your survey is capturing is a long-term trend driven by both supply and demand,” says Allan Swaringen, president and CEO of JLL Income Property Trust, a non-traded NAV REIT. On the demand side, there is greater interest in real estate coming from the baby boomer generation of investors who have acquired wealth and are now focused on where to put it to work to both preserve capital and generate income for retirement, he says. Speaking to the supply of real estate investment products, Swaringen believes HNWIs are more aware of a wider variety of real estate investment options, including non-traded REITs. “We have spent a lot of time and effort over the last five to 10 years trying to develop commercial real estate solutions that are really tailored to the high net worth investor,” he says. JLL Income Property Trust’s investor base currently includes more than 17,000 HNWIs.
HNWIs started 2020 flush with capital. According to Capgemini’s World Wealth Report 2020, global wealth held by HNWIs—typically those who have upwards of $1 million in net assets—grew by 8.6 percent last year with U.S. individuals posting an 11 percent increase. Capgemini does expect the pandemic to erode some of those gains with early analysis showing an estimated decline of between 6 percent and 8 percent during the first four months of 2020. Some industry participants believe that HNWIs are more keenly focused on rebalancing investment portfolios rather than putting new capital to work.
“The significant drawdown in equities in March was shocking to a lot of people,” says Davin Carey, a managing financial advisor at Carey & Hanna Tax & Wealth Planners, an Oxnard, Calif.-based firm that advises HNWI clients on tax and wealth planning. “Any time we go through a shock to any part of the market or any part of the economy, clients are rudely awakened to reevaluate what their risks are.”
Investments that have less volatility and less potential for huge drawdowns have been a bigger part of the conversation with HNWIs, notes Carey. Real estate assets generally fill that void and also have the ability to achieve tax-efficient growth, capital preservation and the potential for appreciation and income, he adds.
Survey methodology: The NREI research report on high net-worth investment in commercial real estate was conducted via an online survey distributed to NREI readers in July. The survey results are based on responses from 474 participants. Of the total survey respondents, 32 percent identified themselves as private equity investors, 12 percent investment sales broker and 10 percent each as developer or financial intermediary. The respondent base includes a mix of individuals from owners and executives to brokers and research analysts. However, more than half (55 percent) described their role in the commercial real estate industry as an owner/partner/president/chairman/CEO or CFO-level executive. Respondents operate in all regions with 48 percent active in the South / Southeast / Southwest; 47 percent in West / Mountain / Pacific; 45 percent in the East and 36 percent in the Midwest / East North Central / West North Central. In addition, respondents are active across property segments. However, most are involved in multifamily at 63 percent, office 50 percent and retail at 50 percent.