New program helps professional investors understand the risks and volatility of the real estate sector

October 2, 2018

PHILADELPHIA, PA: Institutional investors are gradually expanding their holdings in the commercial real estate sector. Last year, institutional investors’ target allocations to real estate averaged 10.1 percent, edging up from 9.9 percent in 2016, according to National Real Estate Investor. Today’s pension and mutual fund portfolios typically include investments in real estate assets.

But there are frequent reports in the business press of commercial real estate deals that have gone sour, causing repercussions for investors worldwide. To mitigate these risks, investors in commercial real estate must acquire a high level of skill and expertise.

As institutional investors, fund managers, and ultra-high-net-worth individuals look for a better yield on their investment capital, diversification for their portfolios, or protection against inflation, they continue to turn to commercial real estate. Assessing Commercial Real Estate Investments and Markets, a new program offered by the Aresty Institute of Executive Education at the Wharton School of the University of Pennsylvania, may help investors tread more confidently in this challenging but potentially lucrative sector.

Assessing Commercial Real Estate Investments and Markets sharpens professional investors’ acumen when it comes to commercial real estate, both domestic and international. The program will launch this December under the guidance of Academic Director Todd Sinai, a Wharton professor of real estate, business economics, and public policy. “Real estate often promises a stable dividend and some capital appreciation,” says Sinai. “But the down side of real estate investing is the potential for higher risk, and the difficulty of parsing it out.”

In the program, Sinai and other Wharton real estate experts help professional investors become more discerning evaluators of commercial real estate offers and opportunities. Participants will come away with a better understanding of how to make real estate a more valuable slice of their clients' or institutions' diversified investment portfolios. The program will also educate participants on how to understand the different investment risk profiles that may exist for a property type based on location, current occupancy level, ownership/management structure, and existing debt.

For example, "you could have two office buildings in San Francisco right next to each other, one of which will get destroyed if there’s a real estate crash, and the other will sail through fine,” says Sinai. “And you wouldn’t have been able to tell by looking at them from the outside.”

The program also helps participants refine their grasp of different ways to invest in real estate, as Sinai notes that real estate is not limited to buying a building or a piece of land. Other options include investing in public equities (REITs), lending to real estate developers, or investing in real estate debt. “All those methods have their own pluses and minuses, pros and cons," Sinai says.

Moreover, a savvy investor needs to understand the economic drivers of the real estate sector. “Demand for real estate is determined by economic growth,” Sinai says. “There is no need for more office buildings without employment growth, and there are no malls without shoppers.”

The hunt for growth areas also means that investors should be open to real estate opportunities globally. But Sinai cautions that the international approach brings with it a whole new set of risks: "Investors need to think about currency exposure, counterparty risk, and whether their investment is protected by the rule of law.”

Assessing Commercial Real Estate Investments and Markets will help investors strengthen their understanding of the risks and rewards of this growing sector. For more information:

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