Real Estate: at the core of private investors’ asset allocation
The unique value of prime real estate as a non-replicable asset is attractive for long-term investors.
Families and successful entrepreneurs are usually looking for asset allocation strategies that are able to deliver sustained value accretion over a long period of time. Private investors tend to have a long investment horizon for part of their global wealth. Such a time horizon has to anticipate for periodic economic crises, financial crises and market crashes that occur regularly in history. The recent “one-in-a-generation” crisis due to Covid-19 is an example of such situations.
This time horizon is the defining factor behind the asset allocation of wealthy families, which tend to encompass strong quality assets with good fundamentals – especially in the equity space, – owned businesses or direct investments – often in the space where the family is knowledgeable, as well as a significant portfolio in real estate. A recent report from BNP Paribas Wealth Management showed that entrepreneurs have over 10% of their global portfolio invested in real estate, whether directly or through specialized investment funds.
The focus on real estate has been a staple of families’ wealth management strategies for a long time. Behind the secular growth of the space – as demonstrated in valuation of real estate especially in large cities –, there are some strong reasons explaining why real assets, and real estate specifically, tend to fit well with the families’ mindset.
Real estate is, by essence, non-replicable and tangible. In a world where everything becomes digital it may seem insignificant but it actually means a lot. In the world of digital, almost everything can be copied and the value of uniqueness disappears. It means that the use value of any asset is limited to the current use at current price. Almost every digital asset has a declining marginal value. While 50 years ago, parents could have transmitted their hard-to-find collection of vinyl records to their children, nowadays nobody will want – nor could they – to donate their Spotify playlists to their children.
Conversely, real estate, like fine art, deals with unique assets. While the characteristics of two assets could be very similar, prime real estate is by essence rare and in demand. Furthermore, real estate is one of the very few class of assets – barring commodities – that has value beyond its resale value: its use value; namely, the owners can actually use the real estate directly. We saw a good illustration very recently, during the Covid-19-related lockdown period, where a stark contrast in experience appeared between those owning vacation estates and those forced to stay in the cities.
This triple characteristic of real estate – unique, non-replicable and use value – is especially true for prime real estate, whether residential, industrial, logistical or commercial. Prime real estate, the most desirable lots and locations, is even rarer and most in demand, which attracts even more interest. Prime real estate, as such, is therefore an asset class, which offers a relatively good value protection for an investor with a long-term investment horizon.
These characteristics have made real estate one of the main asset classes attracting private investors’ interest, including wealth management clients. However, finding the right investment in real estate is a complex task. The market is large and relatively illiquid, with only a small fraction of assets being transacted every year, with a large number of these transactions being done outside the public market. It is therefore key as an investor to have access to the best brokers and the best experts to obtain the knowledge about the deal flow and be able to invest at the right time in the right asset.
The attraction to real estate is one of the key reason why BNP Paribas Wealth Management has established a strong real estate practice, with BNP Paribas Real Estate and Strutt & Parker, two of the most active and largest real estate brokers in Continental Europe and in the United Kingdom. Thanks to these two leaders in their markets, the clients of BNP Paribas Wealth Management have exclusive access to the best deals on the market and can maximize their chance to deploy their wealth in optimal real estate at the best time.