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High-Net-Worth Investors Turn Bullish on Real Estate, But Study Suggests They Are Too Exposed

A global survey of more than 2,000 high-net-worth investors commissioned by Barclays Wealth reveals that approximately one in four respondents (26%) believe that residential and commercial real estate provide better long-term prospects than other asset classes.

Slightly more than half of respondents expect an increase in the value of their real estate investments over the next two years, and 35% plan to increase their real estate exposure in the near term. The survey findings were contained in a Nov. 30 report titled “Prospects for Property: On Solid Foundations?”

What’s the basis of such optimism in the face of global economic headwinds and a lingering credit crunch? One explanation is that 40% of respondents with at least $50 million in assets have more than half of their investment portfolio tied up in real estate.

“The survey has revealed that investors are holding a much higher proportion of their wealth in real estate than we would normally recommend,” says Michael Dicks, chief economist at Barclays Wealth in New York. “This suggests a real need for people to consider diversifying their portfolios into other asset classes in order to reduce risk.”

Barclays Wealth provides high-net-worth clients worldwide with banking and investment management services. The global wealth manager’s client assets total $221 billion.

The Economic Intelligence Unit, a division of London’s Economist Group, conducted the survey of high-net-worth individuals with investable assets ranging from $800,000 to more than $48 million. The survey was conducted in August and September.

U.S. gets thumbs up

Slightly more than 75% of respondents currently invest primarily in their domestic real estate markets. The United States ranks as the most attractive global market for commercial and residential real estate, with 16% of respondents selecting this market.

China and the United Kingdom are tied as second most appealing real estate markets, according to the survey results, while India is a tad behind in fourth place. France, Spain, Canada, Brazil, Germany and Australia round out the list of top 10 markets.

Among the 10 countries and regions most heavily represented in the survey, investors from Middle Eastern countries and Canada are most likely to increase their allocations, while Spain is the only country in which the average allocation to real estate is expected to fall.

“Within the context of their existing real estate portfolios, it is encouraging to see that some respondents are looking overseas,” says Dicks of Barclays Wealth. “However, there is evidence in the report of home bias, when investors prefer to focus on the market they know best. Diversification overseas is an important means of avoiding an excessively concentrated real estate portfolio, and investors also seem to underestimate how straightforward it can be to achieve this through vehicles like REITS (real estate investment trusts).”

What’s the advantage to investing in residential real estate? Nearly four out of 10 respondents (38.3%) say that the key advantage is the potential for rental income, followed by the capital gains potential (28.6%), and the long-term track record of the sector (27.1%).

“Investors find real estate to be an attractive investment for a variety of reasons, including the potential for both capital appreciation and rental income,” concludes Brian Nick, investment strategist at Barclays. “But we have to weigh those potential benefits against the fact that the real estate market is neither liquid nor transparent, which are also desirable characteristics for assets in a portfolio.”

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