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The Opportunity

The scale and characteristics of income producing properties provide an investor with many layers of diversification, and the income stream produced is different from the income generated by other types of investments.

An initial diversification layer is created through the use of real estate as an investment within a multi-asset portfolio (composed of stocks, bonds, and other asset classes). The inclusion of real estate provides significant diversification benefits due to their low correlation with stocks and bonds. The leading NCREIF private property index has performed well at times when the S&P 500 index has dropped. This typically improves the risk-return characteristics of an investment portfolio through improved strategic asset allocation.

A second layer of diversification is derived from the real estate itself, as a result of the variety of property types and different geographic regions in the United States; markets in different cities or regions of the U.S. often do not perform in concert. Economic fundamentals operate under the same broad framework, but performance of real estate across the country varies at any given time due to local demographics and economic conditions.

A third layer of diversification comes from the multiplicity of investment structures available within real estate. Investments can be made directly or indirectly through either public or private property investment companies. These investments can be as either debt or equity, with equity carrying the most risk but the highest potential returns. Debt carries less risk, but returns are limited as they are fixed and no premium is returned to investors if the property outperforms.

A fourth layer is created by the fact that the point of these properties is to attain multiple tenants. This provides a diversification of cash flow, minimizing the risk of 100% vacancy.