Risk control in the current investrment market was high on the agenda at IMN High-Net-Worth Real Estate Investing conference in New York City. While many panelists at the conference viewed abandonment of real estate investments as the best option, Michaell Taylor, Ph.D. and a principal at Boxwood, offered up an alternative.
Taylor told conference participants that Boxwood's research has shown conclusively that substantial risk reduction can be obtained by diversifying investments across a variety of real estate investment vehicles such as REITs, direct investments, preferred REITs and CMBS. As demonstrated at the conference, these investment alternatives offer very different performance profiles and are subject to very different risks. Over the past several years, REIT performance has been decoupled from performance of underlying real estate. This disconnect, in turn, yields both risk and potential rewards in portfolio construction.
For instance, Taylor explained that efficient frontiers for portfolios allocating across sub-classes of real estate reduce risk by several hundred basis points compared to investments in any single sub-class. Backtest results confirmed this conclusion, and he emphasized the need to recalculate allocations often in light of changing market conditions. Taylor also addressed the future of interest rates and their influence on real estate investments.