March 2023

Why Private Real Estate?

By Richard Hillson

We don’t need another article about how the traditional 60/40 model is struggling in the
current environment. Nor do we need another commentary on equity underperformance in the
last 12 months. However, we must address the facts:

- The S&P lost close to 20% in 2022 and signs of a recovery are tepid
- Fixed income assets have rebounded to some degree but are still not setting the
world on fire in terms of yield
- Inflation based on CPI data shows a 6.5% increase in the last 12 months

I have long stated my position on incorporating alternatives into every portfolio. This is not just
as a diversification tool, but also to offer other options to achieve total return, yield, and
inflation hedge.

The professional money managers, the endowments, have been allocating heavily to alternative
strategies for years—providing additional diversification and less correlation than traditional
portfolios. It’s a trend worth paying attention to.

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Historically, advisors have allocated to alternative investments from the 60% stock allocation
rather than the 40% bond allocation. I have been an advocate for a different approach. Even if
an asset is classified as an alternative investment and therefore perceived as risk capital, we
should consider what the goal of the investment is. If we are looking at a total return, or a
potentially volatile asset, then we should consider this from the 60% stock allocation: if the
alternative asset is a predictable, real asset backed yield play, this should be considered part of
the 40% bond allocation in the 60/40 equation. I believe this is a misstep many investors make
which results in a poorly balanced portfolio, mainly due to the misunderstanding and
misclassification around ANY alternative investment.

Normally, the first-place investors look when moving away from the most traditional asset
classes is real estate. Most investors newer to the alternatives space will look to the public
market’s REITs are often seen as the first step into the alts world. But what about private real
estate?

The first advantage is that valuations are tied to real assets and fundamentals, rather than
public market volatility and investor sentiment. Private real estate has shown a much lower
correlation to public equities than public real estate vehicles, making this asset class a very
valuable diversification tool.

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Private real estate has also performed admirably during periods of rising interest rates (given a
Long-term time horizon), due to the potential for raising rents to keep pace with inflation, and
managing debt exposure. The current interest rate environment is probably the number one
concern I hear in conversations at the moment, so an asset class that has historically performed
in this environment must be considered.

Private real estate also offers the potential to invest in off-market opportunities and unique
value situations. Public real estate opportunities are often limited by very restrictive investment
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provisions which limit flexibility. For the average investor, who may not have a significant sum to
allocate to alternatives, it is key to achieve diversification within diversification. What I mean by
that is being able to invest in a flexible structure which allocates to different real estate
strategies and profiles gives further diversification, rather than a single product type fund.

Mid 2021, investors were happy with their equity performance and were predominantly chasing
yield to replace fixed income assets. At every conference, yield was the buzz word. Now we are
seeing investors look more to a total return profile, whether that be from yield alone, or a
hybrid of yield and potential for capital appreciation.

Real estate is a great space to start getting clients comfortable with the alternative investment
space because it is a hard asset with income and the potential for long-term appreciation. Many
advisors will only look as far as public real estate opportunities but there are some very
interesting opportunities in private real estate. As more investors and advisors are becoming
comfortable moving away from the traditional 60/40 model, alternative investments should be
considered as part of their strategy moving forward. Interest in exploring private real estate, is
very high on the 2023 list for advisors and investors alike.

I have been speaking with Humphreys Capital for a few years now and have found their
approach to private real estate very interesting. Their diversified private real estate income
fund, Humphreys Real Estate Income Fund (HREIF), offers monthly distributions and the
potential for long term appreciation— - a compelling opportunity that should be considered
alongside public options.

If you would like to explore further, I recently hosted a webinar with Humphreys Capital
discussing the benefits of including private real estate to personal investment portfolios as well
as the portfolios of wealth manager clients.

Click the link to access the replay of that webinar: https://youtu.be/MnbVDOGi8h8

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About Humphreys Capital

Humphreys Capital is a real estate investment company that acquires, develops, and operates
income-producing, multi-sector properties including industrial, multifamily, office and retail.
The Firm’s investment and development focus is on dynamic high-growth cities across the
United States, where it specializes in privately negotiated off-market, mid-size deals of
institutional quality. The multigenerational team provides seasoned expertise and exposure to
diversified commercial real estate for accredited and institutional investors. The Firm has raised
more than $715 million since inception across four funds. Visit www.humphreyscapital.com for
more information.

Disclosure: Humphreys Capital, LLC has a written agreement in place with Hillson Consulting for payment of a
one- time fee for production and /publication of this webinar and /article.  Hillson Consulting is not affiliated
with Humphreys Capital, LLC.  Hillson Consulting is not a current or former investor or advisory client of
Humphrey Capital.

Richard Hillson

Hillson Consulting is a boutique investment consultancy founded by financial services

entrepreneur Richard Hillson. The company helps independent advisors enhance and improve
their offerings and drive revenue through alternative investments. HC also works with product
sponsors to help them with education and access within the independent RIA channel.

richard@hillsonconsulting.com