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Can a real-estate strategy weather the storm?

Advisor explains his firm’s signature strategy, which he thinks will protect investors through the downturn

By David Kitai

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Investors should have taken on real estate ballast in their asset-allocation strategies before the current downturn, says one leading advisor. If they haven’t yet, he thinks investors should look for real estate exposure to protect capital.

Jason Nicola, a financial advisor at Nicola Wealth Management, told WP about the asset allocation strategy his firm has set their clients up with. He explained that they strike a three-way balance between fixed income, equities, and real estate to protect clients on the balance of probabilities. They’ve pushed for this defensive strategy lately, on the premise that North America, after more than 10 years without a recession, is due for an overall downturn.

“Ask yourself how much of your portfolio have you allocated to fixed income to publicly traded equities, maybe to real estate, maybe to alternatives,” Nicola told WP. “What were your reasons for setting those allocation targets? And have they changed?”

Nicola’s asset allocation strategy, practiced by the firm for more than 20 years, involves both heavy exposure to real estate and to private equity. Those asset classes, Nicola explained, are less subject to market volatility. Private equity, despite being nominally higher risk than the TSX composite, tends to offer lower volatility in crisis moments because transactions are made with a different mindset than investors selling privately held stocks.

Real estate investment opportunities aren’t hugely varied, according to Nicola, but new products are hitting the market. Life insurance companies, for one, offer some exposure to real estate beyond the concentration risk of buying into a single building. Nicola Wealth, as well, manages three real estate limited partnerships investing in buildings, with price determined by purchases, sales, and audits rather than the stock market. Nicola warned, though, against using REIT’s to deliver real estate exposure through the stock market directly.

“We’ve invested in them in the past, but it needs to be at the right valuations,” he said. “Right now, with the volatility, that would not be the way I would be going about getting real estate exposure.”

If the Canadian economy enters a recession, as Nicola predicts, real estate values will very likely take a hit. Nevertheless, he said that in 2008 Canadian real estate outperformed equities, despite both taking double-digit hits. Real estate exposure, Nicola says, will minimize volatility while delivering a similar long-term return as equities.

“I look at this as an opportunity for investors to reassess and think ‘what do I want my asset mix to look like in the future?,’” Nicola said. “’Am I really comfortable having 70% in stocks?’”