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HNWIs Show a Preference for Direct Investment in Real Estate

With the sector facing headwinds, HNWI enthusiasm for commercial real estate has dampened and what type of investments they prefer has shifted, according to WMRE exclusive research.

High net worth individual (HNWI) investors that have been steadily increasing allocations to commercial real estate over the past several years appear to be taking a pause amid market uncertainty. That’s according to the latest edition of research surveying readers of WMRE and (brought to you by Ashcroft Capital).

The annual survey polls both financial advisors and commercial real estate professionals to get their perspectives on HNWI and accredited investor strategies related to commercial real estate investing. The survey also sheds light on where perception of HNWI investment aligns or diverges between the real estate and wealth advisor communities and on how sentiment shifts from year to year.

One area in which both camps agree is that 61% report that HNW allocations to commercial real estate are flat. Those results are dramatically different from a year ago when nearly half of financial planners and three-fourths of commercial real estate professionals reported rising allocations to real estate. This year 34% of real estate pros and 26% of advisors said allocations to the sector are rising.

“Coming out of the Great Financial Crisis, the trend has been increasing allocations to commercial real estate. That hasn’t been just a linear trend, but moving in an upward direction for a decade,” says Jay Frank, president and COO of Cantor Fitzgerald Asset Management. That being said, new commitments to commercial real estate began to slow in late summer 2022. The slowdown accelerated into year-end and has continued into the second quarter due to market uncertainty and the impact of higher interest rates on real estate values. With the latest 25 basis point rate increase on May 3, the Fed has now raised interest rates at 10 consecutive meetings for a total of 500 basis points since early March. Once the Fed signals that it is going to be done with its rate increases, it will likely lead to investors picking their pencils back up and getting back in the game, adds Frank.

A second reason behind the pause in new allocations is that investors are rebalancing portfolios following a drop in stock values. “We’re seeing the target allocations to real estate stay generally the same, but due to the denominator effect, the actual allocation has increased. So, we have seen across the industry less dollars available for real estate because of that,” says Zack Otte, a principal and lead of the asset management practice for Plante Moran Real Estate Investment Advisors.

Growing desire for direct investment

Another notable shift in sentiment is that direct investment in multi-tenant commercial and multifamily properties ranked as the most popular investment vehicle. Nearly half of commercial real estate professionals (48%) said that direct investment was the most popular choice for HNWI investors, while 39% of financial advisors said the same thing. Preference for private equity real estate funds, which has typically ranked number one as the preferred vehicle, dropped to 37% for both camps compared to past surveys where the vehicle consistently rated between 50% to 55%.

“From the conversations that we’re having with investors, there does appear to be a preference for direct investment,” says Mehul Chavada, CIO at Casoro Group, a commercial real estate investment firm serving HNWI clients. That focus likely is being driven by a desire for greater control in this uncertain market. Over the past few years, competition fueled compressed cap rates, which made it very easy for everyone to make money, notes Chavada. “We’re no longer in those times where you’re making money just because you bought an asset. Now you have to hold it for longer and generate cash flow and that alpha,” he says.

Private placements also rated favorably among 31% of respondents, including an equal number of both financial advisors and commercial real estate professionals. Ashcroft Capital is one firm that has seen interest in private placement funds become more popular since 2020 compared to individual asset offerings. “A lot of that had to do with the pandemic and investors that were sitting on the sidelines or seeking ways to diversify and limit risk, as we see in any type of recession or pullback,” says Travis Watts, director of investor education at Ashcroft Capital, a real estate investment firm specializing in value-add multifamily properties.

However, there is a divergence between advisors and real estate pros when it comes to identifying vehicles. Real estate pros tend to identify private real estate structures (funds, placements, direct investment) as the top choices while advisors have a more balanced view and rate REITs, ETFs and mutual funds as more popular options.

Advisors rated ETFs (37%), REITs (34%) and mutual funds (32%) nearly as highly as private options. However, those figures are all drops from 2022 for ETFs (49%), REITs (43%), mutual funds (35%). Real estate pros, however, scored REITs and mutual funds at 11% and ETFs at just 9%. Wealth advisors also had higher scores than real estate pros for semi-liquid structures with non-traded REITs (15% vs. 7%), BDCs (12% vs. 1%) and interval funds (8% to 2%). Notably, the sentiment on ETFs, REITs and mutual funds did drop for both camps from a year ago.

“No matter the vehicle, we’re definitely seeing a shift towards high-quality managers that have a track record of navigating through prior cycles, so you have more of that comfort in having that experienced management team to be able to navigate through this current cycle,” says Otte. However, for those clients that are doing direct investing, Plante Moran is seeing investors take more of a “pencils down” approach as investors wait for signals from the Fed that its rate increases are going to be paused, he adds.

The full HNW report will be published in June.

Survey methodology: The WMRE High-Net-Worth Investor Survey (brought to you by Ashcroft Capital) was conducted via an online survey distributed to and WMRE readers in April 2023. The survey results are based on responses from 295 participants. Of the total survey respondents, 65% identified themselves as financial advisors and 35% as commercial real estate professionals. More than half of the respondent base work for an independent B/D or RIA. Among commercial real estate professional respondents, 61% said they were an owner, partner or C-suite executive. Respondents operate in all regions with 46% active in the South / Southeast / Southwest; 41% in West / Mountain / Pacific; 37% active in the East and 24% in the Midwest. In addition, respondents are active across property segments. Most are involved in the four main sectors, with multifamily at 56%, retail at 50%, office at 46% and industrial at 45%.

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