Blackstone is preparing a record $50 billion vehicle to scoop up real estate bargains during the downturn

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Residential real estate is arguably the most valuable and accessible segment of real estate asset class. Its popularity has driven a disproportionate amount of capital into residential real estate — particularly from institutional funds — pushing up valuations and pushing yields lower.

Real estate investment giants continue to buy up homes — something that is likely here to stay, even with higher mortgage rates. In fact, Blackstone is close to finalizing what could be the biggest traditional private-equity real estate investment fund in history, according to the Wall Street Journal.

In a regulatory filing last month, Blackstone said that it has secured $24.1 billion of commitments for its latest real estate fund called Blackstone Real Estate Partners X. Combined with Blackstone’s real estate funds in Asia and Europe, the company will have over $50 billion available for opportunistic investments.

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In the event of a market downturn, Blackstone will have plenty of capital to scoop up some attractive real estate bargains.

But earning a good yield isn’t easy in today’s economic climate. The gross rental yield for a typical New York apartment is just 2.9 per cent. The dividend yield on residential REITs is also mediocre.

Low single-digit yields are tough to swallow in an environment where interest rates are rising and inflation is at 9.1 per cent.

Investors need to look beyond residential properties. Here are some niche REITs that offer better returns.

Don’t miss

Healthcare properties

Healthcare is the most defensive sector. Recessions and credit cycles don’t have much impact on emergency healthcare services, which makes hospitals and clinics ideal real estate targets.

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Omega Healthcare Investors (OHI) focuses on nursing homes and assisted-living facilities across the US and UK. The company focuses on triple-net leases with 64 operators across these two countries.

The rapidly aging population across the Western world is a significant tailwind for Omega. The company expects consolidation in the market and organic growth for the foreseeable future.

This niche REIT offers an 8.6 per cent dividend yield and trades at 1.9 times book value per share.

Cannabis Warehouses

Legal cannabis has been a volatile sector. It’s still a highly regulated and intensely competitive industry. In aggregate, cannabis stocks have disappointed investors. By comparison, leasing warehouse space to cannabis producers has been a better business model.

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Innovative Industrial Properties (IIPR) owns and operates one of the largest networks of cannabis warehouses across the US. As of June 2022, the company had 111 properties comprising an aggregate of approximately 8.4 million rentable square feet with 100 per cent leased out to state-licensed cannabis operators.

The REIT offers a 7.1 per cent dividend yield and trades at 1.7 times book value.

Mortgage REITs

Most REITs focus on the equity portion of the properties they acquire. In other words, they put money down to buy properties, pay interest on the mortgage and collect rents — a traditional landlord model.

However, some REITs focus on acquiring mortgages and collecting rents. This is a capital-light model that could lead to better yields if managed properly.

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Starwood Property Trust (STWD) is the largest mortgage REIT in the country. The Greenwich, Conn. company specializes in commercial mortgages. Since its inception, it has deployed over $83 billion to multifamily investors, oil and gas producers, hotel managers, retail stores, and enterprises for their property purchases.

Mortgage REITs like Starwood are more vulnerable to rising interest rates. That’s because the business model hinges on the net interest margin — the gap between borrowing and lending money. As interest rates rise in 2022, Starwood could see its net margin compress. Its portfolio of outstanding loans could also see lower valuations.

At the moment, the REIT offers an 8.1 per cent dividend yield and trades at just 1.15 times book value per share. It’s clearly out of favour now but could deliver exceptional returns if interest rates plateau next year.

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Starwood is an ideal target for investors with an appetite for high-risk, high-reward wagers.

Fine art as an investment

Stocks can be volatile, cryptos make big swings to either side, and even gold is not immune to the market’s ups and downs.

That’s why if you are looking for the ultimate hedge, it could be worthwhile to check out a real, but overlooked asset: fine art.

Contemporary artwork has outperformed the S&P 500 by a commanding 174 per cent over the past 25 years, according to the Citi Global Art Market chart.

And it’s becoming a popular way to diversify because it’s a real physical asset with little correlation to the stock market.

On a scale of -1 to +1, with 0 representing no link at all, Citi found the correlation between contemporary art and the S&P 500 was just 0.12 during the past 25 years.

Investing in art by the likes of Banksy and Andy Warhol used to be an option only for the ultrarich. But with a new investing platform, you can invest in iconic artworks just like Jeff Bezos and Bill Gates do.

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