Gauging the COVID-19 Impact | Wealth Management

Overall, respondents believe HNWIs have a healthy amount of capital already placed in commercial real estate with a mean allocation of 19.2 percent.

In total, 41 percent of respondents estimate HNWI allocations to be 10 percent or less of investment portfolios, while one-third of respondents (32 percent) said that allocations range between 11 and 25 percent; and 27 percent believe that real estate allocations are 26 percent or higher.

HNWIs tend to be a diverse group with different views on both allocations and investment strategies. For many, investment strategies have shifted in the wake of COVID-19, but they have shifted in different ways depending on whether the view is to use real estate investments as an alpha driver or a shock absorber for investment portfolios during uncertain times, notes Ben Adams, CEO of Ten Capital Management, a privately held real estate investment management firm based in Cleveland.

“We have some clients who have absolute stars in their eyes about future distress. They are really licking their chops and can’t wait to see those investment opportunities,” says Adams. At the same time, other investors are looking to real estate to generate consistent, stable cash flow without the wild volatility that has been characteristic of the stock market of late, he says.

Respondent views varied on HNWI preferences on commercial real estate investment types. They said HNWIs were comfortable with riskier value-add or opportunistic investments. In all, 56 percent of respondents consider HNWIs to be very or extremely interested in value-add, while half are very or extremely interested in opportunistic. Core and core-plus strategies also rated high with nearly half of investors (each at 48 percent), while those who said HNWs were very or extremely interested in distressed investments drew a slightly lower favorable response of 42 percent.

Although some advisors and sponsors see HNW investors who are looking to take advantage of opportunistic investments, most see a group that is moving more cautiously. That caution also is evident in the broader investment market with commercial real estate transaction volume during second quarter that fell 68 percent compared to the same period a year ago, according to Real Capital Analytics.

Depending on the asset class, there is “hesitation to react until the other shoe drops”, which means the slow transaction volume could linger until a vaccine is developed and distribution, potentially into 2023 or 2024, wrote another respondent. “COVID has made all investors, especially HNWIs, rethink portfolio allocation and put more emphasis and thought into cycle-resilient real estate. Property types such as multifamily, single-family rentals, student housing, condos, etc. will be favored more as office and retail attract less interest from tenants,” wrote another survey respondent.