Wharton@Work

March 2019 | Finance

Investing in Real Estate: Reap Rewards, Manage Risk, and Avoid the Pitfalls

With today’s volatile stock market, investment professionals are increasingly eyeing real estate as a possible port in the storm. Yet that port holds hidden perils for those who haven’t acquired the special expertise to navigate this broad and complex asset class. The sector has unique advantages and pitfalls, risk and return structures, and investment strategies, not to mention what can seem an intimidating array of choices. Commercial or residential? Direct investment or real estate investment trust? And that’s just the tip of the iceberg.

Assessing Commercial Real Estate Investments and Markets is a new Wharton Executive Education program that provides clarity on the subject. At the helm is Academic Director Todd Sinai, a Wharton professor of real estate, business economics, and public policy.

Sinai remarks that while real estate often promises to yield a stable dividend and some capital appreciation, there’s a downside: “the potential for higher risk, and the difficulty of parsing it out.” Parsing out that risk is a pivotal theme throughout the program. Participant Jacky Chen, a high-net-worth investor and business advisor for York Angel Investors in Toronto, says he appreciated learning more about ROI and risk analysis in real estate so he can “measure and quantify my investments in more detail.”

“While I have used traditional risk analysis tools in this space, the course expanded my vision into using other valuable tools,” says Chen.

And Dr. Song Liu, a director of bioinformatics, says the program “conveyed important information such as how to focus on the risk first, and how to use different techniques to project the profits and returns.”

Sinai emphasizes that he imparts the concept of risk to the participants in a hands-on way, so they become truly “thoughtful about the risks,” as opposed to “having other people discuss it and it just sort of washes over them.” He guides the class to work through a variety of realistic deal scenarios. Given this approach, it’s easy to see why participants have praised the program as being practical and real-world.

Sinai was extremely pleased with the launch of Assessing Commercial Real Estate Investments and Markets. “The group worked very well together. It was a terrific dynamic.” He recalls how gratifying it was to walk participants through real-life scenarios and “see the light bulbs go off: ‘Oh okay, I see where the exposures are in this deal.’”

Many participants reported changing their investment strategies after attending the program. Capital Safi CEO Jorge Quintanilla says he attended while developing a product program for the launch of his company’s real estate fund. He returned to the office with “the critical insights and frameworks” he needed to “structure our funds for the long run.”

Chen also made a significant decision as a result of attending: he changed his investment portfolio to include real estate investment trusts (REITs). “Even when the stock market dropped recently, my REITs did pretty well,” he notes. He also decided to move out of some Canadian apartment building investments to make investments in the U.S. multifamily sector, which he says is important to his overall strategy.

Indeed, getting a fuller picture of global real estate investment was a major benefit for some participants. Faculty member Maisy Wong’s presentation on cross-border investment strategy and how to hedge currency exposure is a program highlight.

By all accounts, the program, which ran for the first time in December, was a hit.