Opportunities for Diversifying Your Portfolio Through Investing in Retail Properties
Adding a retail real estate investment to your portfolio is an effective diversification technique if your portfolio currently contains other types of commercial real estate or entirely different classes of investments altogether. There are also opportunities to diversify your portfolio by investing in different types of retail properties. These strategies are detailed in the following.
What Does Portfolio Diversification Entail?
Diversification is a common practice that involves adding different types of investments to your portfolio, limiting the amount of damage that can occur if one type of asset begins performing poorly. The purpose of this strategy is to reduce portfolio volatility. When one asset drops in value, you may have several additional asset types that have recently increased in value, which offsets your losses.
While there are many ways that you can diversify an investment portfolio, the most used option is risk diversification. If you want to make an investment that comes with a high level of risk, your portfolio should also contain several low-risk investments that provide consistent returns and help to balance the total risk in your portfolio.
Consider Different Property Classes
Retail properties are available in a few different classes. One method you can use to diversify your portfolio is to invest in more than one retail property class. Even though not all classes make for good investments, you should still know what they are and how they could impact your portfolio.
Class A retail properties are new construction within the past five years and made to match the latest building standards. They are usually found in the center of downtown areas or popular business districts and are well-connected to other commercial hubs. These investments come with the least amount of risk and should provide you with relatively high and stable returns. This is the main type of retail investment that you should consider adding to your portfolio.
Class B buildings are usually well-maintained and may have been recently refurbished. It’s possible that some of these buildings require light renovations. These structures typically range from 7-20 years old and will be located in or near areas with high activity among shoppers.
While rents for these structures can be high, they are commonly lower than the rents collected at Class A buildings. The main benefit of slightly lower rents is that the building will be more accessible to potential tenants, which may help you bring in a higher ROI.
These buildings are found farther from retail hubs and don’t have good connectivity. It’s possible for these structures to be around 25-30 years old, which means that they will require a moderate amount of maintenance, repairs, and upkeep. The risk is also higher with this type of investment because of the difficulty of appealing to potential tenants.
Class D buildings are rarely ever invested in. While they have the potential for high returns depending on how well they are renovated, bringing these buildings up to market standards is challenging and costs a considerable sum of money. The most effective solution is to place a mixture of Class A and B investments into your portfolio.
Think About Mixed-use Spaces
Mixed-use spaces are a combination of industrial, warehouse, and retail spaces. Larger shopping complexes and malls oftentimes fall under this category. While the lease agreements associated with these buildings can be complex, it’s possible for multi-use spaces to provide a fantastic return on investment.
Invest in Multiple Locations
You can also diversify with retail real estate by investing in multiple locations. The retail real estate market is largely insulated from the stock market but is still dependent on the local real estate market, which is why location matters with these properties.
Even if the real estate market that you’re about to invest in is currently performing well, there’s always a chance that a downturn will take place over the next few years. In this scenario, having investments in other locations means that you can mitigate your losses and keep your portfolio diversified.
Now that people are shopping at brick-and-mortar stores at a higher rate following the COVID-19 pandemic, portfolios that invest in retail real estate have a sizable growth potential in the short and long run. When you’re trying to diversify your portfolio, make sure that you consider different property classes, invest in multiple locations, and look into mixed-use properties.