During the financial crisis, BigSur Wealth Management’s
clients grew weary of trying to grow their wealth in a highly volatile and
poorly performing market. As a result,
the Miami-based firm and its clients--mostly wealthy families from Latin
America--began exploring opportunities to invest in an asset class with low
correlations to the stock and bond markets: commercial real estate.
Investing directly in such properties as apartment and
office buildings--which produce steady income streams stemming from long-term
contracts and leases--turned out to be popular with the firm’s clients, some of
whom liked being able to inspect the properties themselves. Now roughly 10% of
client investments are in commercial real estate, and they are expecting to
boost that exposure to 14% or 15% in the next year or two.
These days, amid low interest rates, an increasingly
expensive U.S. stock market and choppy global economic growth, other financial
advisers are looking to commercial real estate to boost returns for clients and
diversify their portfolios. According to a recent survey from BlackRock Inc.,
large institutional investors are likely to make significant shifts in asset
allocation this year, and are showing greater interest in such physical assets
as office buildings, bridges and roads.
REITs can be bought directly or through mutual funds or
exchange-traded funds. Publicly traded REITs work well for some clients because
of their accessibility and similarity to other publicly traded securities,
making them easy for clients to understand. And REITs typically pay dividends that
are much higher than the meager interest generated by most bonds.
Raqfael Iribarren, a managing partner at BigSur, which manages about $800 million,
says his clients prefer more direct exposure by co-investing with institutional
asset managers rather than investing in funds, including REITs. This way, he
says, clients have more control over the asset. For instance, they would have a
right to vote in decisions being made about the property, such as whether to
sell the asset or make improvements, and they would also get more direct
interaction with the property managers. Also, by avoiding REITs the clients
won’t be exposed to a host of other properties they have no interest being in.
But advisers warn that there are some common traps to watch
out for when investing in commercial real estate. For one thing, advisers have
to fight some clients’ natural tendency to invest only in their hometown
markets. While it’s natural for a client to be comfortable with their local
real-estate markets, chances are that investor already owns a home or business
in that market.
While Mr. Iribarren says BigSur’s clients don’t have a
hometown location bias for their real-estate investments, lately clients have
been clamoring for more commercial real-estate investments, which are harder to
come by now and are much more expensive since the financial crisis, when
investors started piling in.
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