National Resources... Leadership Reports
For decades, real estate investment has relied on contractual income, with values driven primarily by fundamentals rather than daily fluctuations in public markets. This has made this asset class a reliable component within diversified investment portfolios. However, this reality has changed as central banks raised interest rates at the fastest pace in decades, leading to the repricing of real estate assets and a slowdown in transaction activity. While short-term capital value declines can affect asset prices, they do not fundamentally alter the sustainability of income.
This highlights a core principle: asset prices can deviate from underlying fundamentals. In the real estate sector, Net Operating Income (NOI)—defined as rental revenue remaining after deducting operating expenses—is the primary performance metric. While valuation multiples and market sentiment influence short-term pricing, NOI remains the main driver of returns over the long-term investment horizon.
Today, the real estate sector’s performance is increasingly fragmented across sectors and geographies. As traditional core sectors undergo structural redefinition, alternative assets such as data centers, senior living facilities, and self-storage have emerged as important sources of stable, long-term income. Building a resilient real estate portfolio requires moving beyond traditional assumptions and leveraging valuation dislocations between public and private markets.
Private and public real estate are not interchangeable; each plays a distinct role within an investment portfolio. Private real estate offers direct asset control, flexible structures, and opportunities to generate excess returns (alpha) through active management, albeit at the cost of lower liquidity and reliance on appraisals-based valuations. Conversely, public real estate, through Real Estate Investment Trusts (REITs) and Exchange-Traded Funds (ETFs), provides liquidity, transparent pricing, and efficient access to specific sectors and regions, though this comes with increased exposure to equity market sentiment and higher short-term volatility.
Understanding the relationship between private and public real estate is essential for building resilient, diversified portfolios. Strategic allocation to both helps combine the complementary strengths of each structure within a broader wealth management strategy. Consequently, portfolios can benefit from the liquidity of public markets alongside the control and flexibility offered by private investments.
Real estate income is characterized by its contractual nature and has historically demonstrated resilience against inflation, through lease repricing, rent escalations, and rising replacement costs. Supported by these stable fundamentals, the real estate sector has contributed to diversification and reduced reported volatility compared to public markets. However, 2022 demonstrated that valuations in private markets are not immune to repricing, and part of their stability reflects a lag in appraisal processes. Therefore, combining public and private investment tools enables the realization of long-term value while maintaining tactical flexibility.
A wide range of real estate investment strategies exists, each playing a distinct role within a portfolio and varying in terms of risk and return sources, ranging from owning income-generating assets to developing new assets to create additional income streams. As illustrated below, target returns and the range of variability around them widen as risk levels increase. Although these real estate investment strategies are available in both private and public markets, their implementation mechanisms differ significantly. Private market investments typically rely on long-term ownership structures with lower liquidity, whereas public strategies are often accessed through specialized real estate investment trusts (REITs) or exchange-traded funds (ETFs) focused on specific sectors, providing liquid and tradable real estate exposure in financial markets.
Core Strategy: Invests in stable, fully leased assets with the objective of achieving stable, low-volatility income. Returns are primarily derived from contractual rent rather than value creation, with target total returns typically ranging between 6% and 10% (Preqin).
Core-Plus Strategy: Builds on the fundamentals of the Core strategy through limited leasing, asset management, and income enhancement initiatives, accepting limited execution risk in exchange for additional returns. Target total returns typically range between 8% and 12% (Preqin).
Value-Add Strategy: Shifts the return source from ownership to execution, where managers renovate poorly managed assets, re-lease them, or reposition them to increase net operating income and asset value. Outcomes depend heavily on operator skill, with target total returns typically ranging between 11% and 15% (Preqin).
Opportunistic & Distressed Strategy: Targets assets requiring significant redevelopment, conversion, or financial restructuring. Returns are derived from value creation rather than existing income, with outcomes dependent on management execution and market conditions. Target total returns can exceed 15% (Preqin).
Demographic demand is one of the most sustainable drivers of the real estate sector, and the senior housing sector clearly exemplifies this trend. As a growing number of the baby boomer generation in the United States enters their eighties, demand for this type of asset is increasing, without a corresponding growth in supply. This favorable supply-demand balance provides a supportive environment and positive outlook for the sector.
The tailwinds generated by demographic shifts are not limited to the United States. In Asia, the population aged 60 and above is expected to nearly double to 1.3 billion by 2050, representing a quarter of the continent’s population. Japan is already one of the most advanced countries in terms of population aging, with approximately 30% of its population aged 65 or older. Meanwhile, South Korea surpassed the threshold of a “super-aged society” in 2024, with the proportion of people aged 65 and above exceeding 20%.
As a result, demand for senior housing, healthcare facilities, and infrastructure for elderly care services is expected to grow significantly. With projections indicating that the senior housing market in Asia will more than double by 2030 (Colliers), the robust demand currently observed in the U.S. market may signal a broader global investment trend driven by demographic aging.
These demographic shifts also support the growth of alternative real estate sectors, including senior housing and other specialized real estate assets. More broadly, structural trends such as population migration and the formation of new households continue to shape long-term demand across various real estate markets, supporting a diverse range of assets including multi-family housing, student housing, and self-storage facilities in major urban centers.
While demographic trends serve as long-term demand drivers, other market forces operate within shorter timeframes. These faster-paced transformations are reshaping demand patterns, making asset repositioning and development a central pillar of value-add strategies.
The sustained growth of e-commerce is one of the most prominent examples. As online shopping becomes increasingly prevalent, demand for modern logistics facilities has risen, since e-commerce companies require significantly larger storage and warehouse spaces compared to traditional retailers. This supply-demand imbalance has created opportunities to redevelop underperforming commercial assets, including struggling shopping malls and department stores, converting them into distribution centers and logistics facilities that meet the needs of the growing digital economy.
• Public versus private real estate dynamics: Public real estate offers liquidity and tactical flexibility, while private markets provide direct asset control and the potential to generate long-term excess returns (alpha) through active asset management.
• A structural hedge against inflation: Lease structures, escalating rent escalations, and rising replacement costs help preserve purchasing power during periods of inflation.
