Protecting the Value of Real Estate-Rich Portfolios

Perhaps more so now than in the recent past, the fate of the U.S. real estate market hinges on the behavior of interest rates. Meanwhile, the trend toward legally enforceable titles has only just begun in many emerging markets, making them an unsure bet for investors. Given these variables — which are difficult to predict and represent significant risk — many real estate entrepreneurs are looking for ways to protect their portfolios.  

While predicting the movement of interest rates is notoriously difficult, investors in real estate would do well to understand the market forces at work in the sector. In this three-part special report, experts from The Citigroup Private Bank and faculty from Wharton weigh in on the direction the real estate market is headed — in both the U.S. and abroad — and offer insights on ways investors can reduce the risk exposure of real estate-heavy portfolios.

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I. The Impact of Higher Rates on U.S. Commercial Real Estate and the Economy

Long-term real estate mortgage rates have remained at attractively low levels, but they likely won’t stay resilient to rising short-term rates forever. Experts from The Citigroup Private Bank and Wharton look at the market forces affecting the U.S. commercial real estate market and consider the potential impact an overheated market and rising rates could have on investors and the economy at large.

II. Circling the Globe for Real Estate Opportunities

Given the potential impact of higher interest rates on U.S. real estate, investors are increasingly searching for opportunities in other countries. In fact, the current real estate boom has gripped investors from Sao Paulo to Shanghai, but they need to be aware of the pitfalls, such as lack of transparency and the inability to secure property rights, that are still common in emerging markets. In order to identify good opportunities, experts from Wharton and The Citigroup Private Bank note, investors need to develop a solid understanding of local economies.

III. A Better Defense for Real Estate-Rich Portfolios

With increasing concern about the potential for declining values in a rising interest rate environment, real estate investors are looking for ways to reduce their risk exposure. Although real estate is still an attractive asset class, experts from The Citigroup Private Bank and Wharton agree that investors with real estate-heavy portfolios need to consider adopting a diversified asset-allocation strategy that helps them maintain flexibility in the face of the “event risks” that real estate is subject to.