Amid record high inflation and the Fed’s consecutive interest rate hikes to reign it in, investors may be wondering which asset class can help them stay insulated from the broader market forces.
While every investment carries a certain level of risk, real estate investments have historically been viewed as a safe(er) haven in times of a market downturn. This is because real estate can be an effective inflation hedge, carries low correlation to traditional markets, and has even benefitted in times of market downturns, generating outsized returns from more quality lenders or sponsors.
Hedge against high inflation
Real estate investments are secured by hard, tangible assets that have an intrinsic value. Historically, these assets have also outperformed public equities during periods of inflation and high-interest rates.
Rent prices often increase in order to keep up with inflation. Income earned from regular rent increases on the properties can also help investors navigate increasing prices, and the high interest rate environment.
| Case Study: Tucson Multifamily Equity Yieldstreet’s Tucson Equity deal is an example of how inflation can benefit a real estate investment, because of the effect on rent prices. Amid record low housing affordability, rental units in the deal saw a $450 rent increase on renovated units, compared to the $150 that was underwritten – thereby outperforming projections. While the deal faced increased interest payment due to interest rate hikes, it also was structured with an interest rate cap, an agreed upon maximum interest rate between the borrower and the lender, which was purchased at closing. Because of the cap on interest payment at a certain level, the deal was insulated from the Fed’s new rate hike. |
Low correlation to traditional investments
Moreover, historically, real estate investments have shown low correlation to stocks and bonds and offered diversification benefits to investor portfolios.
Private real estate debt portfolio for example (as represented by the Giliberto-Levy Commercial Mortgage Performance Index) has produced low to negative correlation with US and global equities in the past ,while private equity real estate has shown modest correlations with public equity real estate and US and global bonds.
Low correlation also helps private real estate act as a hedge against public market downturns.
Capitalize on rising rates
In general, Yieldstreet’s real estate debt offerings can be in the form of fixed rate debt or floating rate debt.
Fixed rate debt can be advantageous for borrowers who don’t want to take the risk of rising interest rates. With floating rate loans , interest payment increases as the underlying benchmark rate increases.
A floating rate debt is typically structured with an interest rate cap, similar to the Tucson equity deal, which limits the increase in interest rates at a certain level. Meanwhile, a fixed rate debt “fixes” the amount of interest payments, and keeps it one consistent level.
The chart below summarizes these differences.
| Fixed rate | Floating rate |
| Presents with a lock-in a low rate Can be advantageous for borrowers who don’t want to take the risk of rising interest rates | Interest payment increases as the underlying benchmark rate increasesTypically structured with an interest rate cap which limits the increase in interest rates at a certain level |
| Case Study: Norfolk Industrial Complex Yieldstreet’s Norfolk Industrial Complex deal, which was driven by strong warehouse demand in Norfolk Virginia, is an example of equity investment with a fixed rate debt. Even amid high interest rates, it’s still set up to generate a consistent cash flow due to “fixed” interest payments, thereby providing investors with a consistent source of regular income, irrespective of changes in the Fed’s rates. |
High quality lenders or sponsors seek alternative capital
As big banks and large institutions tighten credit in times of economic stress, alternate lenders often get better access to high quality lenders or sponsors. This can in turn generate higher returns for similar risk profiles.
| Case Study: Portland Multifamily Financing Yieldstreet’s Portland Multifamily Mezzanine deal is with a top developer in the Portland area, who has a 20% equity stake in the deal. As of now, the deal has an 80% LTC, or loan-to-cost ratio that generates around 12% return. |
Gradual changes in price
Unlike public markets where investor sentiment can cause significant swings in market value, real estate pricing tends to move gradually – which affords investors valuable time when making decisions amid economic distress.
How Yieldstreet selects real estate opportunities
In times of a market downturn, flexibility is key. Unlike many other real estate investment platforms, Yieldstreet deals play across the capital structure. Not confined by a position in the capital structure, our team selects deals — whether it’s debt, equity, mezzanine or preferred equity —primarily based on market conditions and risk profile.
We are currently focused on multi-family and industrial properties for the following reasons:
- Both property types are an inflation hedge because they’re on shorter term leases, which allows them to react quicker to the market.
- In the case of multi-family, the rising cost of a mortgage acts as a tailwind, as renters tend to rent for longer and are driven by necessity rather than choice.
- While many lenders have retreated from the marketplace for a multitude of reasons (i.e., issues in their existing portfolio, warehouse lenders pulling funding, capital markets being closed), debt for multi-family is still available albeit at a higher cost. That should provide a deeper bench of lenders and buyers, setting a floor for this property type.
Moreover, the due diligence process at Yieldstreet is comprehensive and meticulous. The approach is two pronged; the team focuses both on the property and the sponsorship of the investments.
- Property: includes visiting the property, carefully selecting the type of deal, evaluating the tenants at the property, doing appraisals, property condition reports and even environmental reports
- Sponsor: ensure the sponsor has the experience and expertise of the local market, as well as an outstanding track record in conducting similar deals
Invest in private real estate on Yieldstreet
Explore our open opportunities
All investments involve risk, including the possible loss of capital. There can be no assurance that any product or strategy described herein will achieve any targets or that there will be any return of capital. Past performance is not a guarantee or reliable indicator of future results. Current performance may be lower or higher than the past performance data quoted. Any historical returns, expected or target returns are hypothetical in nature and may not reflect actual future performance. All performance and/or targets contained herein are subject to revision by Yieldstreet and are provided solely as a guide to current expectations.
References to specific assets/securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such assets/securities. The investments/securities referenced may or may not be held in the Offering at the time of publication and, if such assets/securities are held, no representation is being made that such assets/securities will continue to be held.
What's Yieldstreet?
Yieldstreet provides access to alternative investments previously reserved only for institutions and the ultra-wealthy. Our mission is to help millions of people generate $3 billion of income outside the traditional public markets by 2025. We are committed to making financial products more inclusive by creating a modern investment portfolio.
2 Represents an net annualized return, using an internal rate of return (IRR) methodology, with respect to the matured investments shown in your Portfolio experience, utilizing the effective dates and amounts of subscriptions and distributions to and from the investments, net of management fees and all other expenses charged to the investments.[read more]