Stocks, bonds and cash. Up until very recently these three asset classes made up the majority of most successful investors’ portfolios. However, in the past few decades, a fourth asset has been making a meteoric rise. From non-existent, to “alternative-asset”, to a full-fledged portfolio necessity—real estate has finally arrived.

The Case For Real Estate

Every savvy investor knows that added diversity is healthy for a portfolio, but why choose real estate?

The real estate industry is enormous, constituting 13 percent of the US GDP. Beyond providing current cash flow and a range of tax incentives, real estate may appreciate in value over the long-term, which can mean exponential growth for a portfolio. Particularly in recent years, real estate has delivered high returns. In 2014, stocks averaged a 5.2 percent annual return, US bonds 6 percent annually, and real estate 15 percent. Adding real estate to a portfolio can add both valuable diversity and yield. This chart shows the difference a substantial real estate allocation can make to a portfolio:

portfolio comparison

Invisible No More

Real estate is still commonly classified as an “alternative asset” (alongside commodities, infrastructure projects, and hedge funds) when it comes to a traditional investment model centered around core assets, like stocks and bonds.

As shown in the graph below, as recently as the 1980s, real estate was almost invisible in global institutional portfolios, dwarfed by bonds, equities, and cash allocations.

cover chart

Today, things look much different. Real estate makes up nearly 10 percent of the average institutional portfolio. For example:

  • The Abu Dhabi and Qatar Investment Authorities have $37 billion and $35 billion invested in real estate, respectively.
  • The world’s largest sovereign wealth fund, Norway’s $923 billion Government Pension Fund, recently raised its allocation of real estate from 0 to 5 percent, a change that amounts to more than $46 billion. (NAIOP)

According to the Cornell/Hodes Weill Allocations Monitor, institutional investors had allocated 8.9 percent of their portfolios to real estate in 2013. Allocations to real estate now stand around 9.56 percent as of 2015. This increase of 66 basis points amounts to an additional investment of $462 billion. Finally, as of September 1, 2016, the S&P will promote equity REITs from a sub-industry of “Financials” to its own “Real Estate” sector within the Global Industry Classification Standard.

Where is Real Estate Heading?

A central factor holding real estate back from being officially deemed a core asset is the inability for individuals investors to access it. It has historically been extremely difficult for the average investor to access private real estate opportunities in the same manner as institutional investors. However, online platforms and innovations in technology have opened up real estate investment to a much broader portion of the population.

Just as institutions have steadily increased the allocation of real estate in their portfolios, so too will individual investors through investing services such as Fundrise.