3 December 2020, Melbourne – Heightened risk and volatility still pervade most of the major traditional asset classes and return compression is being severely felt by the world’s savers.
For investors grappling with how best to respond to the Covid-19 crisis, Commercial Real Estate Debt (CRED) presents a highly relevant, strategic allocation opportunity according to MaxCap Group.
MaxCap today released a White Paper underscoring the strength of CRED as an asset class. The research, conducted in collaboration with the University of Technology Sydney, focussed on a quantitative analysis of CRED risk and return dynamics and the effects of CRED’s inclusion in a diversified investment portfolio.
Wayne Lasky, Co-Founder and Managing Director of MaxCap said, “The results clearly identify that the inclusion of CRED in an investor’s portfolio delivers enhanced returns, provides downside protection, and reduces volatility and therefore increases risk-adjusted returns, the alpha or active return premium. There are very few asset classes that can lay claim to such impressive performance.”
The research analysed a typical diversified Investment Portfolio and looked at the effect adding a 10% allocation to Commercial Real Estate Debt had.
– returns increased from 8.05 to 8.76%.
– volatility dropped from 8.07 to 7.16%,
– the Sharpe Ratio (returns achieved in excess of the risk-free rate) grew from 0.44 to 0.59.
The findings also illustrate that CRED is an important portfolio diversifier because it reduces portfolio risk and has low or negative correlation to other major asset classes. For example, CRE debt is negatively correlated to equities at -0.11 and similarly negatively correlated to Commercial Real Estate (equity) at -0.18.
Put another way, CRED returns improve relative to other asset classes during periods of crisis and sustained economic uncertainty and therefore act as a stabilising force in an investment portfolio.
It would appear that the capital markets are validating this research. Mr Lasky noted that MaxCap has witnessed a marked increase in capital inflows from investors to Commercial Real Estate Debt in 2020, throughout the Covid-19 pandemic. However, CRED allocations still remain relatively small in comparison to many other asset classes. This is largely due to the historical dominance of the Big Four banks in Australia and the fact that CRED opportunities are typically accessed through private markets.
Mr Lasky expects this will change over the coming decade, and CRED will take on increased strategic value for investment portfolios. “Defensive investments that lower risk and increase returns will become the Captain of Defence in the next decade”.
If you would like a copy of the paper or short form version please click link below.