- October 1, 2018: Vol. 30, Number 9

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An underrated strategy: What institutional investors should know about direct investing in real estate

by Ben Maslan and Taylor Mammen

Real estate is becoming an increasingly popular asset class due to its strong performance, relatively stable cash flows, and its characteristic as a natural hedge against inflation. In 2017, the target allocation to real estate surpassed the 10 percent threshold, with the average institutional investor targeting 10.1 percent to real estate, with this number only expected to grow.

Given the larger allocation targets, what is the best way to deploy capital to real estate? Commingled funds remain the most common approach to investing in real estate, with more than 80 percent of institutional investors allocating capital to closed-end funds, and more than 50 percent to open-end funds.

While currently less likely to be utilized, for investors of sufficient size and capabilities, a direct approach — purchasing individual properties through joint ventures or separate accounts — offers greater advantages than commingled funds, with few additional drawbacks.

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