How to diversify with global real estate

June 14, 2019

These days, it’s easy to diversify your investment portfolio, whether you have $500 or $5 million to invest.

Diversifying means not putting all your eggs in one basket. When you diversify, it helps to reduce risk, but it doesn’t completely eliminate it. Diversifying gives you a “smoother ride,” which can help you stay focused on your investment objectives when markets are volatile, rather than tempting you to panic and sell. 

For the average investor, it means buying publicly traded securities from multiple asset classes (i.e., equities, fixed income, cash) and different industry sectors and geographical areas.

But diversification starts to get interesting once you’ve built up some wealth. Then you can move beyond traditional investments into alternative assets like real estate, hedge funds, derivatives, foreign currency and private equity.

These different asset classes provide additional diversification benefits because they have a lower correlation to traditional asset classes, giving you the chance to generate potentially greater long-term returns. How much you allocate to alternative investments depends, of course, on your individual situation.

Real estate without the responsibilities

Real estate, as an investment, has become increasingly popular thanks to years of rapid price growth. For most Canadians, their real estate investment is in the home they live in. For some others, investing in real estate may involve a vacation property or a condo they’re renting out. But the high costs and time involved in managing an income-producing building may be discouraging.

Another way to invest in real estate is to buy fund units or other products that provide exposure to the real estate sector, such as real estate investment trusts, or REITs. Like traditional stocks and bonds, they are publicly traded and widely available.

For investors with significant assets, an area that’s opening up is private real estate investments.

Global opportunities in private real estate

Private investments are not listed or traded on public exchanges. Think Facebook before its initial public offering.

Similarly, private real estate opportunities are not generally available to public investors. They invest directly, or through other funds, in different types of real estate, such as office buildings, residential, commercial and industrial buildings or hotels. The real estate portfolio may include properties in several regions of the world.

Imagine owning part of an office building in Tokyo, a hotel in London or retail space in Australia.

The biggest difference between public and private investments is that the managers of private assets do not have the pressure to satisfy shareholders in the short term. Private managers have more freedom to implement long-term strategies that have the potential to generate better results.

The managers could, for instance, buy a partially unoccupied office building to redevelop it, to bring in more tenants, raise rent or make a profit on its resale—a bit like buying a fixer-upper investment house.

Ideal for patient, knowledgeable investors

The benefits of private real estate are compelling: increased diversification, the potential for higher returns and protection against inflation.

However, private investments aren’t subject to the same rigorous regulatory and reporting rules as public ones regarding the information that must be provided to investors. For instance, there’s no requirement for a prospectus. In general, information about private investments, such as their activities and returns, may be more difficult to obtain.

Private investments also require a minimum investment that can be substantial and are open to investors only for limited period of time. After this subscription period, they no longer accept new investments.

These investments are generally available only to qualified or “accredited” investors, who have significantly above-average income or significant assets.

In Canada, being an “accredited” individual investor means having one of the following:

  • an income of $200,000+ before taxes ($300,000 if combined with a spouse) or
  • net financial assets of $1 million before taxes or
  • net assets of $5 million (which could include real estate)

Investing in private real estate also requires patience. Private investments have a holding period of seven to 10 years or more to ensure the strategies can be properly implemented. It is practically impossible to withdraw your assets before the end of the period.

If you have the money, time and patience, private real estate could be an interesting addition to your portfolio.

The subscription deadline for the MD PlatinumTM Global Real Estate Pool is July 31, 2019. To find out if real estate pools are right for your portfolio, contact your MD Advisor*.

 

* MD Advisor refers to an MD Management Limited Financial Consultant (Investment Advisor in Quebec) or your MD Private Investment Counsel1 Portfolio Manager.

1 Discretionary accounts (or investment services) of MD Financial Management Inc.

The Platinum funds described in this document are subject to additional terms and conditions set out in the Platinum Funds operative agreements and regulatory suitability requirements as considered by the MD Private Investment Counsel Portfolio Manager. The Platinum funds’ operative agreements will also set out additional information about the investment objective, terms and conditions of such fund, tax information and risk disclosure that are a material terms regarding a fund. Any investment in a fund would be speculative and would involve significant risks. The information and strategies presented here are not suitable for U.S. persons (citizens, residents or green card holders) or non-residents of Canada, or for situations involving such individuals. Employees of the MD Group of Companies are not authorized to make any determination of a client’s U.S. status or tax filing obligations, whether foreign or domestic. The fund is intended for individuals that are discretionary managed account clients of MD Private Investment Counsel an operating division of MD Financial Management Inc.

Management fees and expenses associated with investing in MD Platinum private funds may be higher than fees and expenses in public security funds. No guarantee or representation is made that any MD Platinum private investment fund offered will achieve its investment objective.

There are additional risks associated with investing in private investments that are not applicable to typical investments in the public securities markets. These risks include, but are not limited to, the following: private investment funds are speculative and involve a high degree of risk; an investor could lose all or a substantial amount of his or her investment; interests in private equity and private real estate investments are illiquid and there is no secondary market nor is one expected to develop for interests in such investments; there are significant restrictions on transferring private equity and private real estate investments; private equity and private real estate investments experience volatile performance; private equity and private real estate funds are often concentrated and lack diversification and regulatory oversight. Leverage may be employed, which can make investment performance volatile. Real estate investments are sensitive to factors such as changes in real estate values and property taxes, interest rates, cash flow of underlying real estate assets, supply and demand and a manager’s skill as well as credit risks and tax and regulatory requirements.

Metropolitan is a registered trademark of Metropolitan Real Estate Equity Management, LLC. © 2018 Metropolitan Real Estate Equity Management, LLC. All Rights Reserved. MD PlatinumTM is a trademark of The Bank of Nova Scotia, used under licence. MD Financial Management provides financial products and services, the MD Family of Funds and investment counselling services through the MD Group of Companies. For a detailed list of these companies, visit md.ca.

Certain information contained herein constitutes “forward-looking statements.” Due to various risks and uncertainties, actual events or results may differ materially from those reflected or contemplated in such forward-looking statements. As a result, the Recipient should not rely on such forward-looking statements. No representation or warranty is made as to future performance or such forward-looking statements.

The information contained in this document is not intended to offer foreign or domestic taxation, legal, accounting or similar professional advice, nor is it intended to replace the advice of independent tax, accounting or legal professionals. Incorporation guidance is limited to asset allocation and integrating corporate entities into financial plans and wealth strategies. Any tax-related information is applicable to Canadian residents only and is in accordance with current Canadian tax law including judicial and administrative interpretation. The information and strategies presented here may not be suitable for U.S. persons (citizens, residents or green card holders) or non-residents of Canada, or for situations involving such individuals.

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