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Alternative Investments in Asset Allocation Strategies

March 27, 2020
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Traditional Asset Allocation strategies subscribe to the Stocks, bonds, Cash model. In the era of negative interest rates, falling stock market prices, other Alternative asset classes such as Real estate, gold are starting to show favor. Since interest rates have turned negative in Europe and Japan, inverted yield curves in US and elsewhere, Gold and Real estate are making a comeback. With such hard assets, investors can back their portfolio volatility with some physical and solid asset backed holdings, providing some safety and long-term income.

Even though Gold is a nice long-term hard asset, it is a dead asset. It does not provide income except for some Gold ETF’s, ETN (Notes) and Mutual Funds paying dividends. Mostly Gold may provide appreciation in times of economic uncertainty and stock market volatility. In times of war and extreme disruptions in times of disasters, currency devaluations, smaller denominations of gold in gold coins, of say 1g or 10 g each may serve as a valuable means of purchasing necessities. These dire scenarios are unlikely but nevertheless possible.

However, Real Estate income and investment properties are a great long term holding in any portfolio. They are not necessarily the most liquid or short-term plays but investments in publicly traded REIT's can provide the online trading liquidity and income in terms of dividends. Diversification in Real Estate properties can be achieved in terms of asset type and geographic location. The major types of Real Estate Investments in most countries are Multifamily (Apartments/condos/town-homes), Office, Retail Shopping Centers (Malls), Storage, Student Housing, Senior Housing, Nursing Homes, Alzheimer’s-Memory/Acute/Hospice Care, Mixed Use (shops on ground floor, apartments/condos on top floors), Industrial, Oil and Gas, Parking Lots, Golf Courses, STNL (Single Tenant Net Lease Retail or QSR - Quick Service Restaurants, Pharmacies), Medical Office Buildings, Hospitals, Dialysis Centers, etc. Major multinational firms such as Google, Facebook, Apple, TCS and other firms would do well to conceive and develop self-contained office parks, with solar, water, power backup, parking, food, retail, housing, medical clinics, workout facilities, children's/adult daycare, parks, pools, biking lanes, cinemas, schools, post office, drone deliveries, dry-cleaners, doctors, dentists, community centers, shared transportation, etc.

Especially in severe housing and localized facilities stressed locales in Silicon Valley, CA, Bangalore, Chennai, Delhi/Gurgaon, India and cities in Europe, etc. where to attract and retain highly coveted employees is fast becoming a problem. Many would find that eventually its hard-Real Estate assets become as valuable if not more than its other businesses. McDonald's is a case in point, where its Real Estate portfolio worldwide is probably worth more than its retail QSR businesses. If employees of these companies could walk or bike to work within 10 minutes, kids walk to school, after school daycare, elder daycare, you've got productive and faithful employees for life, most of the time! I envision a future where you may find Google City, Apple City, Facebook city, etc. with their own zip codes!

I have been practicing Commercial Real Estate investments in the securitized and syndicated Institutional Class A/B property space, in USA, since early 2000. Therefore, I will limit myself to comments to the known (USA) versus the entire world.

In the era of plummeting interest rates, as cost of financing goes down, and real estate asset prices and income being dependent on debt service due to usually 45 to 55% leverage, real estate continues to become an attractive long-term investment. Yes, the cap rates keep shrinking due to increasing demand by investors due to lower debt servicing cost of holding these properties, so investors compete for a shrinking pool of available properties, bidding up their prices. Still due to lower interest rates, investors can eke out a higher percentage income by at least 0.5 to 1%. The holding period of the real estate assets also shrinks because of readily available pool of investors willing to pay more. So, the total hold times shrink, since investors want to take advantage of fast rising real estate prices. The best recession proof and maximum occupancy real estate investments tend to be multifamily apartments, student housing, senior housing, long-term/acute/memory/nursing care, hospitals, and to some extent storage (store it and forget it).

In the USA, the current 1031 exchange tax provision allows real estate investors to defer their capital gains and recapture of depreciation. Commercial debt markets are currently unsettled due to tenant defaults and demand for CMBS has diminished due to Coronavirus pandemic. Consequently, rates have shot up 100 bps to 200 bps overnight. Except mission critical facilities such as hospitals, clinics, dialysis, medical facilities, warehouse distribution centers, defense, everything else is experiencing a catastrophic downturn. This is a black swan event that no one could have foreseen with any certainty. Therefore, all cash deals may be the safest for investors but going forward, whether they will meet the PPM cash flow projections, remains highly questionable. 

However, real estate in western economies will still be the preferred long-term investment vehicle, however illiquid, because western countries are net consumers rather than net producers or manufacturers, and these economies will have to be shored up with consistently low, zero or negative long-term rates. This financial engineering favors hard assets such as Gold and Real Estate because our bonds and dollar are on a slow death march in the next 20-30 years. I’m not certain even if financial engineering will save ANY type of investments in the long run because our lenders, i.e., Japan and China may force the real interest rates to rise by selling our bonds in which case the value of dollar may decline to 1/10th. to 1/20th., thereby cutting our living standards by a corresponding amount.

Why would Japan and China turn away from their largest trading partner? Because they would have found and developed new export markets and countries in 20-30 years, where they can source their raw materials and sell finished goods cheaply, destroying local industries. This is what colonial powers did when they mined raw materials in slave countries and manufactured goods at home. China's "belt and road initiative" is designed to do much the same and poor countries unable to pay back the Chinese loans are having to sell their ports and industries to China! Brilliant long-term strategy. 

Current real estate investors will benefit in the long term in 20-30 years because in my opinion, our stock markets and bond markets will likely collapse, taking the dollar with it. One of the income producing assets will be real estate and one-gram coins of Gold could be used for expenses. For newer investors in real estate in 20-30 years, high interest rates will possibly kill all free cash flow, so existing investors and their beneficiaries today are the ones that will benefit greatly, if these risks materialize!

What is a 1031 Exchange? Current US Treasury IRS Section 1031 of the tax code provides one of the best strategies for the deferral of capital gains taxes which would ordinarily arise from the sale of real estate. Exchanging defers the recognition of the capital gains tax, leaving the property owner with substantially more proceeds to purchase a replacement property. The tax code states, "No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business, or for investment purposes if such property is exchanged solely for property of like-kind, which is to be held for other productive use in trade or business or for investment purposes." Real Estate Investors can accomplish virtually any investment objective with 1031 exchanges, including greater leverage, diversification, improved cash flow, geographic relocation, and/or property consolidation. The 1031 exchange on sale or purchase of investment properties has to be accomplished with properties located in the 50 States of USA. These Fully managed, OFF-MARKET, turnkey, passive, securitized investments in *Real Estate are available to “Accredited Investors” only. 

“According to the National Council of Real Estate Investment Fiduciaries (NCREIF), the average 25-year return for private commercial real estate properties held for investment purposes slightly under-performed the S&P 500 Index as of the organization's May 9, 2019, report at 9.4%. The report factored in figures as of the end of March 2019. Residential and diversified real estate investments do a bit better, averaging 10.5%.”-J. B. Maverick, article published 3.17.2020 in Investopedia on Average Annual Returns for Long-Term Investments in Real Estate. 

As is the case with any other “investment”, no guarantees, warranties or assurances can be given regarding any returns. Tax laws vary from country to country and investors should consult with their Tax and Legal advisors, including reading the PPM (prospectus) fully before making any such investment or sending any money.

A useful model portfolio would be 10% cash or cash instruments, 5% in 1 Gram or 10 Gram Gold coins, 15% Bonds, 30-35% Real Estate and Art/Automobiles/Collectibles, and rest in Equities. Of course, risk tolerance, goals, investing style, age, needs will vary from investor to investor and the financial/tax advice the investor is getting, so every investor portfolio will be unique.

Mr. Jain can be reached at 408-836-3858, sidjain@mymoneymall.com, www.mymoneymall.com. Mr. Sudhanshu Jain (a.k.a. Sid Jain), MA Economics, is an Independent Broker and a Real Estate Investments & Financial Planning Professional. Mr. Jain consistently has a pipeline of $1 Billion+ of co-owned Class A, 1031 eligible, Fully Managed, Off-Market, Turnkey, Financed, Positive cash flow Income and Investment Real Estate properties nationwide, offering real estate and geographic diversification. California Life/Disability/Health/Variable Contracts License# 0828966. CA BRE License# 01493874. Securities offered through LightPath Capital, Inc., 1453 3rd Street Promenade, Suite 315, Los Angeles, CA 90401, Broker Dealer, Member FINRA, SIPC. Securities Registered Representative-Series 6, 63, 22.