Private real estate: A real asset

IN Partnership with

Since Franklin Templeton’s acquisition of Clarion Partners, the firm has been working to expand access to Clarion’s flagship real asset strategies

DESPITE RECENT HEADLINES, within the North American real estate sector, there are opportunities, according to Clarion Partners managing director, Richard Schaupp. Schaupp is focused on some of the broader tactical advantages that private real estate can offer. “A real estate income strategy includes private real estate as an important strategic component to an investment portfolio, because – over a 25-year market cycle – private real estate performance has historically provided more stable returns than publicly traded REITS , stocks, and bonds,” says Schaupp. “If you’re looking to add diversification, we think there are sectors in real estate that continue to provide growth, which will diversify a portfolio successfully.” Schaupp, a former architect, highlights, “It’s difficult to time strategic investments, particularly stocks and bonds, correctly. However, adding private real estate has historically been materially accretive to a portfolio’s overall risk-adjusted returns. In fact, the larger institutional investors of the world currently allocate about 10 percent to real estate. Given the volatility we’ve been seeing, you realize that diverse investment strategies are more important than ever.”

Franklin Resources, Inc. [NYSE:BEN] is a global investment management organization with subsidiaries operating as Franklin Templeton and serving clients in over 155 countries. In Canada, the company’s subsidiary is Franklin Templeton Investments Corp., which operates as Franklin Templeton Canada. Franklin Templeton’s mission is to help clients achieve better outcomes through investment management expertise, wealth management, and technology solutions. Through its specialist investment managers, the company offers boutique specialization on a global scale, bringing extensive capabilities in equity, fixed income, multi-asset solutions, and alternatives. With more than 1,300 investment professionals, and offices in major financial markets around the world, the California-based company has over 75 years of investment experience and approximately US$1.4 trillion (approximately CAN$1.9 trillion) in assets under management as of August 31, 2023.

Find out more

“It’s difficult to time strategic investments, particularly stocks and bonds, correctly. However, adding private real estate can be materially accretive to a portfolio’s overall risk-adjusted returns”

Richard Schaupp, Clarion Partners

Since the onset of the pandemic, real estate overall has done well, although many see a rate-driven correction at the moment. While Schaupp acknowledges that there are headwinds going forward, he notes that property types are not all created equal. He is choosing to focus on growth opportunities in high-demand real estate sectors such as warehouses and multi-family residential homes, which Clarion believes are experiencing tailwinds in today’s environment.

Publicly traded REITs operate businesses that buy real estate. They have historically been highly correlated to small-cap stocks and relatively volatile compared to private markets. A private real estate income strategy gives an investor the ability to directly invest in properties. The experience is more akin to what people conceptualize when buying a home. Often, an independent appraiser values the assets for private real estate using a thorough and diligent process. Clarion sends their third-party appraiser a wide range of data and information to help promote accurate valuations, including budgets, rent rates, rent rolls, and other relevant data on the property. Appraisers also consider a wide range of sales of comparable properties in the region. As part of the analysis, the appraisers apply a discounted cash-flow method, creating a highly detailed process.

As with any asset class, real estate is diverse, bringing opportunities across a wide range of sectors, sub-sectors, and geographies. When there are challenges in one market or sector, there may be opportunities in others. Schaupp notes that fundamentals within necessity retail – such as larger grocery chains, open-air centres, and giant discount store franchises – have strengthened as supply is now below the long-term average. Previously it had not been a favoured asset class due to the challenges faced by malls and the resulting headlines. Schaupp, however, maintains that “if you look at the simple fundamentals, we feel that the sector is quite healthy, and we are exploring that more.”

While Schaupp is keen to point out the growth in demand for large spaces required by retailers, he acknowledges that the post-pandemic office revival remains lacklustre. The plateau in office space demand has left cities with a growing amount of unused commercial space. Workers have much more flexibility today and spend less time in the office than they did five to 10 years ago. “Post COVID, the work-from-home trend continues to impact the office sector. Even though people are going back to the office more, what we expect from our office space and how we operate in the workplace have completely changed. Therefore, companies are looking to understand how they’re going to better utilize space. We’ve seen office rental rates go down, with a corresponding effect on valuations in certain markets. So, understandably, many people are, from an investment perspective, cautious about office space.” However, industrial and warehouse space is another matter. The rise of e-commerce and re-shoring trends in manufacturing are creating a greater need for warehouses in the United States. According to the US Bureau of Labour Statistics, the US warehouse workforce almost doubled from 2017 to 2022, as companies seek alternatives to sourcing from overseas suppliers in China and other markets after experiencing pandemic-induced supply chain bottlenecks. As a result, commercial real estate research firm CoStar reports that warehouses make up 20 billion square feet, up 20 percent from 10 years ago.

Modern warehouse with automated goods movement system

Published 23 Oct 2023

“We are very strategic about the types of properties we buy and develop and the markets in which we operate, but we remain very active in the industrial space”

Richard Schaupp, Clarion Partners

The type of property dictates the value in commercial real estate

How a private real estate strategy differs from a publicly traded REIT

“Clarion has been active in the industrial sector for more than 30 years, and a large portion of our overall portfolio comprises this property type. We are very strategic about the types of properties we buy and develop and the markets in which we operate, but we remain very active in the industrial space.” The firm also sees multi-family apartments as another area of opportunity.

The millennial and Gen Z generations are entering their prime years for family formation and job stability. Clarion sees these demographic trends as supporting the housing market. “We continue to see apartment rent growth in many markets. Our view is that the United States is fundamentally under-housed; if in the long term we are not building enough housing, we will have a shortage. This will drive the need for people to rent,” Schaupp says. “And all of these other factors, combined with the current interest rate environment – which is further restricting homebuying – are driving our continued conviction in the multi-family sector.”

Schaupp remains cognizant of the risks, noting the paradigm shift in the lending environment. The rising-interest-rate environment has influenced real estate, especially when interest rates were previously so low. People and developers used a lot of debt to finance their properties, and when the debt was very cheap, they were able to pay more for their properties. “We’ve seen values moderate and the yields that people expect on their investments to certainly go up. We’ve seen that in the sectors like multi-family.” “Debt investing is something we’re doing in very strategic areas. As interest rates have gone up, those returns are more compelling. The Fed has not only been increasing interest rates but also encouraging banks to lend less. Subsequently, there’s been a bit of dearth of bank-led capital.” Franklin Templeton’s acquisition of Clarion Partners has been a natural fit for both firms. Franklin Templeton has diversified its capabilities in the alternatives space, while bringing their alternative assets to $250 billion under management. Clarion has improved infrastructural support for their investment managers, accessing Franklin Templeton’s large-scale expertise in analytics, data, technology, service, and risk management. They also get access to a broader investor base because of their parent company’s global reach. Schaupp’s conviction in Clarion’s investment management remains strong, as he asserts, “Clarion Partners has about $80 billion of assets under management. Our network and expertise in this space have also provided us with great tenant relationships. Our job is to see the trends and build and use data to make good investment decisions for our clients. “Our strategy is well positioned today and is structured to invest in private real estate and take advantage of the opportunities that we see. The real estate income strategy has a portfolio that is invested in sectors that have strong fundamentals (multi-family housing, industrial warehouse, and life sciences). Additionally, our use of low leverage and ability to invest in private real estate debt allows has allowed us to pivot our strategy to take advantage of opportunities in the current market environment.”

Disclaimer: This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. This material may not be reproduced, distributed or published without prior written permission from Franklin Templeton. The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The underlying assumptions and these views are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. There is no assurance that any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets will be realized. The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested. Past performance is not necessarily indicative nor a guarantee of future performance. All investments involve risks, including the possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. The risks associated with a real estate strategy include, but are not limited to various risks inherent in the ownership of real estate property, such as fluctuations in lease occupancy rates and operating expenses, variations in rental schedules, which in turn may be adversely affected by general and local economic conditions, the supply and demand for real estate properties, zoning laws, rent control laws, real property taxes, the availability and costs of financing, environmental laws, and uninsured losses (generally from catastrophic events such as earthquakes, floods and wars). Diversification does not guarantee a profit or protect against a loss. Investments in alternative investment strategies are complex and speculative investments, entail significant risk and should not be considered a complete investment program. Depending on the product invested in, an investment in alternative investments may provide for only limited liquidity and is suitable only for persons who can afford to lose the entire amount of their investment. Any companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio. Any research and analysis contained in this material has been procured by Franklin Templeton for its own purposes and may be acted upon in that connection and, as such, is provided to you incidentally. Data from third party sources may have been used in the preparation of this material and Franklin Templeton ("FT") has not independently verified, validated or audited such data. Although information has been obtained from sources that Franklin Templeton believes to be reliable, no guarantee can be given as to its accuracy and such information may be incomplete or condensed and may be subject to change at any time without notice. The mention of any individual securities should neither constitute nor be construed as a recommendation to purchase, hold or sell any securities, and the information provided regarding such individual securities (if any) is not a sufficient basis upon which to make an investment decision. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user. Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FT affiliates and/or their distributors as local laws and regulation permits. Please consult your own financial professional or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction. Clarion Partners, LLC is a Franklin Templeton company.

1. Source: Clarion Partners Investment Research, NCREIF, Bloomberg, REIT.com, 2023Q2. 2. Preqin Investor Survey, August 2020. 3. Covid Pandemic period from March 2020 to December 2022. Source: Clarion Partners Investment Research, NCREIF, REIT.com, 2023Q2.

Private real estate

Publicly traded real estate

About

Directories

Resources

Investments

Pensions

benefits

News

RSS

Sitemap

Privacy

About us

External contributors

Authors

Terms & Conditions

People

Companies

About

Directories

Resources

Investments

Pensions

Benefits

News

RSS

Sitemap

Privacy

About us

External contributors

Authors

Terms & Conditions

People

Companies

RSS

Sitemap

Privacy

About us

External contributors

Authors

Terms & Conditions

People

Companies

About

Directories

Resources

Investments

Pensions

Benefits

News