Asset Allocation With Core Private Real Estate

As a fiduciary, you diligently evaluate equity, fixed income, and alternative investments. You construct client portfolios to meet their goals and objectives. You monitor client investments for performance, risk, and evolving market conditions. When needed, you recommend and implement changes to your clients’ investment programs and financial plans to help them achieve their desired life outcomes.

Today’s market conditions require you to be as active as ever in delivering on those responsibilities for your clients. Inflation, rising rates, volatility, market drawdowns, and the possibility of an extended economic downturn have likely caused you to explore asset classes beyond stocks and bonds to build more durable client portfolios. As a result, most advisors, most likely, recognize the time has come to rethink how to construct diversified portfolios beyond the time-worn 60/40 stock/bond model.

The Rise of Core Private Real Estate

In our opinion, today, private real estate is an asset class many advisors are using to help enhance and diversify client portfolios. And the “core” investment strategy is of increasing interest to advisors looking for another source of durable income. On the risk-return spectrum, core properties represent the lowest risk and return profile of the four private real estate investment strategies.

Risk Return Profiles of the Four Pillars CRE Investing
Risk Return Profiles of the Four Pillars CRE Investing

As the most conservative real estate investment strategies, core investments may be more suitable for clients with longer-term investment horizons or those looking formore consistent cash flow distributions. Many advisors use core real estate investments to complement a client’s bond allocation, particularly in a rising rate environment when bonds are exposed to duration risk.

As you can see here, core private real estate, represented by the NFI-ODCE Index, has provided income returns of nearly 4% and greater over recent 1, 3, 5 and 10-year time frames.

A Source of Durable Income
A Source of Durable Income


Source: IDR, NCREIF-ODCE. Annualized gross total returns and income through Q1 2022. performance is not a guarantee of future results.  Index returns are before management and other fees and expenses.  An investor cannot invest directly in an index.

Core real estate properties are often located in stable, developed markets and have long-term leases with established credit-worthy tenants. Properties are high quality, require minimal maintenance or active management, and are typically capitalized with no more than 30% leverage.

Allocating with Private Real Estate

Data suggests that adding core private real estate may be a productive and prudent approach to portfolio enhancement. For example, the graphic below illustrates the potential impact of adding a 10% or 20% allocation of core private real estate to a traditional 60/40 portfolio.

Adding Private Real Estate to a 60/40 Portfolio May Improve Outcomes
Annualized Portfolio Performance Characteristics; 10 Years as of Q1 2022

Adding Private Real Estate


Source: Bloomberg, NCREIF, USAA Real Estate Research

Historically, adding core private real estate increases income, reduces volatility, and enhances Sharpe ratios while maintaining long-term returns.

Adding Core Private Real Estate to the 60/40 Portfolio
May Reduce Volatility and Enhance the Balance of Risk and Return

Volatility DownSharpe Ratio Up

Core private real estate can also be useful across the spectrum of potential portfolio allocations and risk-return profiles:

Democratizing Core Private Real Estate

We believe core private real estate is an important allocation to consider for your client portfolios. While the asset class has historically been the domain of institutional investors, core private real estate, today these investment strategies are more readily available to individual investors, and you serve an vital role in evaluating and introducing your clients to these opportunities. 

Don’t Forget

If you haven’t downloaded our newest guide, Building a Better 60/40 Portfolio with Core Private Real Estate, you can do so now and enjoy a comprehensive perspective on this critical asset class.

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