For what seems like eons, individual investors and fund managers have defended their preferred asset classes. Amidst rising interest rates, red-hot inflation data, and microeconomic data reflecting a large shift in consumer behavior, a large population of investors are left with the hard question of what asset class is best for their long-term goals and can weather the economic storm ahead.
While in a growing economy, naturally all assets perform well, in a downturn, mitigating risk is a key factor when deciding where to allocate capital for new investments. In a risk mitigation strategy during waves of economic uncertainty, you would find it quite difficult to find a better alternative than multifamily investing. The sharpe ratio is a great way of judging whether an investment is worth the amount of risk to capital that is being invested. It allows funds and investors to calculate the return of a portfolio or investment per unit of risk. As denoted in the figure, private equity real estate outperforms stocks on a risk-adjusted basis. Global P.E. Real Estate on a 5 year basis generated a sharpe ratio of 1.45, in comparison to the Vanguard Index and U.S. stocks at sharpe ratios of 0.44 and 0.33; meaning p.e. real estate produced a 1.45% return for every 1% of risk. Real estate is one of the “safe-haven” asset classes that investors tend to flock to during periods of inflation and economic recession. The figure shown is a great indication of the volatility that traditional assets bring, as opposed to the stability and predictability of the real estate asset class. Multifamily in particular is a great buffer; housing is a core part of living, rents align with the rise of inflation, asset values appreciate over time, and there are extraordinary tax benefits in comparison to marketable securities.