Tangibly Wealthy

Our recent BNP Paribas Global Entrepreneur Report illustrated some fascinating trends in the views of entrepreneurs on investments. Alongside the rising interest in alternative investments in general, and private equity and impact investments in particular, one of the most salient findings was the view across the board about real estate and tangible assets.

63% of entrepreneurs we interviewed from over 20 countries do not view real estate as a risky asset class and rank it the one with which they are comfortable. In a world where the valuation levels of real estate have continued to increase and where liquidity of assets – the ability to sell on an organized market – is a key de-risking factor for many investors, this result could be surprising. However, thinking through the asset classes available to investors and the characteristics of today’s economy, this is in fact quite logical.

Real Estate is a large subclass of tangible assets providing a good illustration. Real Estate’s use value does not depend on financial markets and their volatility. Even if the resale value of an asset disappears at a time of market disruption, the underlying asset can be used by the owner. In periods of disruption, the yield can be reduced but the asset is still worth something, thereby offering some value guarantee, while some more sophisticated financial assets often can see their value disappearing entirely. Hence, Real Estate is an asset class that has characteristics of a long-term investment, keeping value across economic and financial cycles, in line with the vision of a long-term investor.

Furthermore, Real Estate as an asset class has benefited from structural trends over the past decades, both in developed and in emerging markets. These trends, including demographic evolution, urban concentration, new technologies for building, focus on high value lands and assets and transfer of wealth across borders, have provided some above-market returns to the asset class. In a world where interest rates are historically low and thus provide ample liquidity to investors, these trends are still valid and investors continue to feel these perspectives could persist.

According to our BNP Paribas Global Entrepreneur Report, entrepreneurs are therefore investing a significant portion of their assets in real estate. While direct investments are still solid, an interesting development has been the increased interest for investments in Private Real Estate (PRE). Many funds have developed an offer to professionalize management of a real estate portfolio with added value strategies focused on improving lands and buildings and thus increasing returns of the asset class.

Interestingly, over the past decades, the development of financial engineering and the specialization of financial markets & investors have driven key trends where many corporates are divesting from their historical real estate portfolio to free capital and focus on their core business—with specialist, outsourced real estate firms offering corporates the real estate services they need. Real estate asset managers have often been behind these trends, enabling the fast rise of PRE funds focused mainly on commercial real estate and its logistics.

For investors, these Private Real Estate (PRE) funds are another option to expand their tangible asset investments while diversifying themselves into a portfolio of direct real estate investments. However, this also means that the best PRE funds are sought after by many investors. As a result, gradually, the best performing funds are often oversubscribed, thereby restricting access to all but the wealthiest private investors.

In that context, private banks are often the catalyst to help private investors access the best funds.